Appraisals are Killing Appreciation!Tuesday, 06/19/2012 10:08 AM
Whether you are Selling or Refinancing your home, your success is often ultimately decided by an Appraiser. I have had hundreds of clients call me over the last 6 years wanting to Refinance, but unable to do so because their home did not have enough equity. The government knows this too. That is why last year a game changing Refinance plan was introduced for many homeowners - Refinance even if value is upside down! Today, though, I am going to speak only to Real Estate Sales in which a buyer wants to buy and a seller wants to sell. These Sales - not Refinances - are what affect your value as a homeowner. This post will explain why Low Appraisals are killing many deals - MANY DEALS - and frustrating both Buyers and Sellers alike.
Recently I suggested that low priced Short Sales will actually prevent the market from appreciating the way it normally would. I also suggested that with our inventory extraordinarily low, appreciation would be commonplace if not for the problem with Low Appraisals, usually because of low priced short sales still hurting values. This post will attempt to tie these two issues together, and give a little explanation as to why this happens. It is not a stretch to say that if more appraisals were coming in at the price the Buyer is willing to pay, we would already have quantified Appreciation in many Santa Clarita neighborhoods today. Remember, "Market Value" is supposed to be what a Buyer is willing to pay and a Seller is willing to accept. However, in our current Real Estate Market, Buyers and Sellers are agreeing on a price only to have the Appraiser essentially tell the Buyers they "overpaid", killing the escrow. To explain how this happens let's start with what an appraisal is and what it isn't.
It is paramount to understand that an Appraisal is an OPINION of Value. Meaning, if you hire 5 Appraisers you will get 5 different Values. There is no "book" that says you give specific Value adjustments for certain improvements. Instead there are "guidelines" that each Appraiser interprets and applies slightly differently. In theory, this should mean that if your home is worth $500,000, then 5 different Appraisals will come in between $475000-$525000. For reasons that I will explain, however, that is not always the case. So Appraisal is opinion, not fact. Next, Appraisers are wildly different in their knowledge and expertise in your neighborhood. Very often your Appraiser will not have seen the inside or the yards of the homes that they put in their report as your comparables or "comps." Meaning if your home has much better interior upgrades or superior hardscape/view/privacy/pool/lot size to the others that have sold in your area, an Appraiser will likely not give you anywhere close to the same "value" that a Buyer would that has seen all the "comps." Further, the Appraiser may or may not even be from Santa Clarita and understand differences in school district lines, construction quality, popularity of floor plans (single stories almost always sell for a premium over 2 stories for example) and other factors that influence value. The example that comes immediately to my mind was on a Westridge home that I had in escrow. The appraiser used Stevenson Ranch "comps," was unwilling to consider my rebuttal and the deal fell apart. Ironically, it was not a difficult Appraisal to bring in, but he wouldn't hear it. That homeowner is still in that home when he could have already moved where he wanted. So Appraiser competence is not uniform. Also, because of changes to the Appraisal business about 3 years ago, Appraisers are often prevented from discussing the information they have on neighborhood sales with the Listing Agent, supposedly to prevent being "swayed" to bring the Appraisal in at value. This is strange because Appraisers RELY on the Agents that sold the homes to accurately describe the property and you would think that talking to them would be encouraged, not discouraged. It used to be that way, but no more. Last, and to the surprise of many, Appraisers do NOT avoid Short Sale and Foreclosure "comps" when valuating a "Standard" sale. Meaning that if you are selling, the Short Sale down the street that sold for a lot less than it "could have", very much influences whether your Appraisal will come in or not. Short Sales and Foreclosures are considered the same as your move in condition home, and will be evaluated with adjustments made for condition that often do not reflect what a Buyer thinks. Don't be surprised if the comparable sales used are distress sales in far inferior condition or location and that the Appraiser values the qualities your home offers for a lot less than a Buyer would. Many Buyers today are aware of the lack of inventory, have seen far too many poor condition distress sale homes and WANT to pay more for quality. Appraisers, though, under strict guidelines from the banks, simply cannot make adjustments on their reports to bring in the value that the Buyer is willing to pay. It isn't necessarily fair, but it is the way it works.
So if that is what appraisals are, what do Buyers and Seller do when Appraisals do not come in at value? First, a Buyer can always accept the appraised value and put more money down to satisfy the bank's "loan to value" requirement. This happens a lot. Second, Sellers can wait for better sales to close in their neighborhoods to show Appraisers that their home really is "worth it." I have had 4 instances in the last year where Agents called on my pending Sale, needing it to close so they could get their Appraisal in and close their deal. They waited, used our "comp" and closed their escrow. That is how, slowly, stabilization and ultimately appreciation will occur. Third, Sellers with superior properties will often take my advice and just market their home only to Buyers willing to remove the Appraisal contingency entirely. This often means waiting for cash or high down payment Buyers. It can take longer, but these Buyers do exist. They understand that an Appraiser's "opinion" of the home's value will be lower than their own, and accept that. The more often these 3 situations occur in Santa Clarita, the better the "comps" will be and the sooner Appraisers can have the Sales that they need to support Values Buyers are willing to pay.