Beware the appraisal.

Creative Commons License photo credit: sooperkuh

I had fully intended to quickly bury yesterday’s “What day is it?” stream of consciousness post with something a little more relevant to real estate, but I got sidetracked.  I had an unscheduled crisis on my hands. Consequently, I found myself spending the better part of the day appealing the appraisal of a seller client’s home, an appraisal which missed by not a few Benjamin’s but by a whole bunch and threatened to derail an otherwise fine escrow.

In the case of my low appraisal yesterday, there were so many things wrong, I didn’t know where to start. It marked only the second time in eleven years that I have had an appraisal come in low on one of our transactions, and the other not so coincidentally was just a couple of months ago. So, it seems like a good time to post a cautionary note to sellers. Just because you have a buyer who is willing to pay “X,” “X” being a palatable price to you, this doesn’t mean you are going to be cashing that check. And if you are unrealistic about pricing yet happen to hit pay dirt with that one buyer who is willing to pay more for your home than the market would suggest he should, you will still have a very large appraisal hurdle to overcome.

I often fret the appraisal these days for many reasons. A slower market and fewer sales means fewer “comps” on which the appraiser can base their estimate of market value. And, lenders who are paying for their blank check-writing practices of the past several years are skittish, with the result being that appraisers are under more pressure to make a defensible and even conservative determination of value.

I didn’t see this one coming. It was a no-brainer, as they say. In an area of few sales over the past six months, we were lucky enough to have a carbon copy, a model match, around the corner which sold just one month ago. Well, there was one difference — our model match enjoyed a location which, in technical appraisal speak, would be considered inferior. In this case, inferior means it backed to a very busy four-lane road. For all but the most devoted NASCAR enthusiasts, this would be considered a negative. 

Our appraisal made no adjustment for location. Our appraisal was also fraught with errors in the areas of features, amenities and even views. More surprising though was that our appraisal factored in a time diminution of value. More recent sales were dinged at a rate of almost 1.5% a month to reflect a declining market. It was the whole declining market argument that had me scratching my head.

What a strange and different market we are dealing with. Five years ago, anyone could get a loan for any amount. Today, even the most qualified buyers are having to undergo a lengthy interrogation process to secure financing. When we were in the throes of a rapidly appreciating housing market, one where offers routinely exceeded asking price and always exceeded the price of the last comparable sale, we still had to sweat the appraisal, but we did so because appraisers were reluctant to give consideration to market trends. Today, the rules are apparently different.

Past performance may not be indicative of future results. Then why is it OK for an appraiser to assume as much? And if every appraisal used this declining market logic in determining value, how would our market or any market reverse course? I understand, from the lender’s perspective, the need for caution in this market. And I understand the need for appraisals to confirm that a contract price is reasonable, in the ball park. But, if a transaction is found to be legitimate, arms length, and absent fraud, shouldn’t appraisers be recognizing that the biggest determiner of value is what a buyer is willing to pay?

I suppose not. One last side note. Short-sales and bank-owned sales do matter. They are “comps” today and, at least in our case, no adjustment was made for the distress nature of these sales. Fortunately, we were successful in getting our appraisal overturned, but Seller beware. Your home is not sold until the Fat Lady closes escrow. And this requires that the property appraise at contract price, which is no small feat in our current market.

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