What’s going on with appraisals in some parts of the country? Mortgage lenders and appraisers say they’re increasingly coming in with valuations higher than the contract prices agreed to by sellers and buyers. The differences can range into the thousands.
Are some sellers giving in to lowball offers, fearful that they can do no better in the wake of the sub-prime mortgage implosion and home-sale bust? Or are appraisers simply lagging behind downward market adjustments?
“We’re seeing it a lot now. Appraisals are coming in higher than the contract,” said Patrice Yamato, president of Plaza Mortgage Group. It’s a reversal of the pattern during the housing boom years, when appraisals often came in at or occasionally below the contract price.
“I think buyers are pushing very, very hard,” Yamato said, and they’re walking away with steals.
Appraisers insist that their value opinions are based on hard numbers: recently closed comparable sales, current comparable listings, pending sales, statistical trend line analyses and adjustments for special features of the property and its location.
“We’ve got to use the most recent market data that is available to us,” said Pat Turner, an appraiser active in the Richmond, Va., area. “We can’t just make it up” to hit a contract price, Turner added.
Generally, appraisers perform valuations for lenders to help determine whether the collateral — the real estate securing the mortgage — is adequate. Prospective buyers typically receive a copy of the appraisal, but sellers do not. If it indicates they sold for less than the appraiser’s estimate of true market value, they are none the wiser. Nobody in the transaction has any incentive to break the news to them.
“It certainly puts us in an uncomfortable position when we find that the selling price is below market value,” said Karen J. Mann, a veteran appraiser in the Brentwood-Discovery Bay area east of San Francisco. “We wonder what’s going on out there. Are sellers giving in to the bottom feeders,” those who troll for hints of distress or urgency? Perhaps too much property has been sitting unsold, and some sellers are feeling time pressures.
It raises a fundamental question for sellers and buyers. What is true market value, anyway? One definition might be: It is whatever an arm’s-length, ratified contract says it is, adjusted downward for concessions or inducements the seller packed into the deal. For example, if a contract is for $250,000, but the seller is paying $10,000 of the buyer’s closing costs, the actual market value should be $240,000.
Another approach incorporates a time element and is used by corporate relocation specialists who resell the houses of executives transferred cross-country. Relocation firms often ask appraisers to do projections on what the property would sell for within specific time periods — 90 days, 60 days, etc. A house that might sell for $400,000 during a 120-day listing period might have to be priced lower to guarantee sale in a shorter time period.
Not all appraisers are surprised that appraisals are beginning to come in above contract prices. Gary Crabtree, president of Affiliated Appraisers in Bakersfield, said bloated sales prices over the last five years, plus hidden concessions and fraud, “have distorted the data” and the public records in some parts of the country.
“When mortgage fraud and concessions get built into” local recorded sales prices and tax assessments, he said, those inflated values “become the new comparables” that appraisers use. In effect, hard-bargaining buyers may be squeezing some of the fluff out of earlier sales.
Frank K. Gregoire, a longtime appraiser based in St. Petersburg, Fla., and chairman of the Florida Real Estate Appraisal Board, said that when the market is moving, appraisers “have to look not only at closed sales and current listings” but also tap into sources of dynamic information, such as realty agents who specialize in the micro-market where the property is located and who know how fast the inventory is building, where the concessions are buried and what’s motivating active buyers.
Sellers can protect themselves against low-ballers and vultures by hiring an experienced appraiser before listing. Though they rarely advertise it, many appraisers conduct independent appraisals for homeowners for modest fees. Top professionals often carry the “SRA” (senior residential appraiser) designation and can be located nationwide through the nonprofit Appraisal Institute, www.appraisalinstitute.org.