Whether you are selling or attempting to refinance, your success is often ultimately decided by an appraiser. We all know this, I have had hundreds of clients call me over the last 6 years, wanting to refinance, but unable to do so 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-you could refi even if you were upside down! Today though I am going to speak only to purchase money loans, where a buyer wants to buy, and a seller wants to sell and move on. 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 buyer and seller 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 appraisals not coming in, 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 in June 2012 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. Remember, “market value” is supposed to be what a willing buyer will pay and a willing seller will accept. They agree on a price only to have the appraiser essentially tell the buyer they “overpaid”, and kill the escrow. To explain how that happens, let’s start with what an appraisal is-and isn’t.
First, I explain to many buyers and sellers that an appraisal is an OPINION of value. Meaning, if 5 appraisers come out to your home, you will get 5 different opinions of value. There is no “book” that says you give a certain amount for certain improvements. There are instead guidelines that each appraiser interprets and applies slightly differently. In theory, this should mean that if your home is worth $500,000, that 5 different appraisals will come in between $475000 and $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 yards of the homes that they put in their report as your “comparables”. Meaning if your home is much better in interior upgrades or superior hardsacpe/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 likely did see all of those homes). Further, the appraiser may or may not even be from Santa Clarita and understand differences in school district lines, construction quality, popularity of floorplans (single stories almost always sell for a premium over 2 stories for example) and other factors that do influence value. The appraisal that comes immediately to my mind was on a Westridge home that I had in escrow, the appraiser used Stevenson Ranch comparables, 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 been where he wanted. So appraisal 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 desribe 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 sales in evaluating a “standard” sale. Meaning, 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 valuation will come in or not. Short sales and foreclosures are not considered different in any way from your move in condition home, they will be evaluated exactly the same with adjustments made for condition that often do not reflect what a buyer thinks. Meaning, if you are selling and the comparable sales are distress sales in far inferior condition or location, don’t be surprised that an 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 willing buyer wants to pay. It ain’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 banks “loan to value” requirement. This happens a lot. Next, sellers can wait for better sales to close in their neighborhoods to show appraisers that their home realy is “worth it”. I have had 4 instances in the last year where agents called on my transaction in escrow, needing it to close so they could get their appraisal in and close their deal. They waited, used our “comp” and closed theirs. That is how-slowly-stabilization and ultimately appreciation will occur. Last, sellers with superior proerties 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 appraisers “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 and the sooner appraisers can have the sales that they need to support values buyers want to pay.