My favorite way to define home appraising is that it’s an art rather than a science. In today’s market, which changes almost on a daily basis, the art has been elevated to the grand master level.
This crazy real estate market has gone on almost as long as we first heard the word COVID-19. Homes are being listed and sold in days, frequently over asking price and continually breaking sales records. A large percentage of recent sales have been all cash, eliminating the need for a property appraisal a lender would require. However, there are still plenty of good buyers who require financing and are losing properties because of cash offers. This is beginning to turn around a little in parts of the country, leaving buyers with another problem to deal with, appraisals that come in short.
If a lender-required appraisal comes in below the contract price, the buyer has no choice but to make up the difference, renegotiate the price or walk away from the transaction. In this market, sellers have no appetite to renegotiate the price with other buyers waiting for available homes, so it’s up to the buyer to figure out a way to make it work.
As reported by CoreLogic, about 13% of appraisals came in below the contract price in August. This was down from a recent high of 19.7% in May but above 7.3% back in January of 2020. 7.3% is more in line with a normal market, however, this market is moving so fast that it’s sometimes impossible for appraisers to find acceptable sales to support contract prices. Buyers who are able are making creative decisions like putting down as little money as possible and reserving extra cash should the appraisal come in low. Some buyers are finding the cash at the last minute and removing the mortgage contingency, allowing the sale to go forward.
A lot of buyers feel the appraisal process is too subjective, but it’s frequently not the appraiser’s fault. Closed sales and pending sales have a lag time, so if you’re analyzing closed or pending sales to support a recent contract you may be actually looking at sales prices that are months old. In this market, that could be a whole different generation of data.
Appraisers say they do incorporate variables like condition and appreciating markets in their determination, but without a comparable sale close to the contract offer, it’s hard to justify. Motivated sellers can certainly provide information to appraisers, which is still within the rules, specifically, information about high-end finishes or amenities unique to their location that may make the property more valuable.
To further make the appraiser’s job more difficult, the federal government after the housing crisis enacted new guidelines. These guidelines are intended to keep a space between the appraisers, who need to be independent, and the mortgage brokers and real estate brokers. Nevertheless, according to the National Association of Realtors, in August, 12% of the real estate contracts that were terminated were caused by appraisals issues. This was up from 9% in 2019.
If you’re currently involved in a real estate transaction that requires a home appraisal, have some appreciation of the appraiser’s job. Their goal is to protect both buyers and sellers in a frenzied real estate market with a lot of money at stake. In their own way, they are artists, always looking for the exact mix of color.
