Are Dated Appraisals Holding Back the Recovery?
By Andrew King
Some of the most beaten down real estate markets are finally experiencing that long-awaited bounce back from the crash. Cash offers are yielding more sales. Pent-up demand is driving prices higher. But something?s missing.
Brokers in the faster markets such as Nevada, California and Florida?where the soaring prices almost defied gravity leading up to the crash five years ago?are finding it hard to move all these homes even though there are plenty of willing buyers. While the homes are available, the mortgages are not. More specifically, they say, the appraisals are not.
While a would-be buyer could be more than qualified to pay back a $1 million loan for an Arizona McMansion, in many cases, the banks can?t sell them that mortgage?even if the loan officer wants to?because the appraiser won?t sign off on that $1 million valuation.
?It happens a lot in an escalating market,? says Gino Blefari president and CEO of Intero Real Estate Services, a brokerage in the red-hot San Francisco Bay area. ?You have to go back to the appraiser and say, ?look, there were 27 offers on the property. Now that we?re having more sales, we?re better.??
It?s becoming a heated issue across the country as low appraisals continue to squash real estate deals that already have the blessing of would-be buyers, sellers and banks.
At the heart of all the tension are the comparable properties, or ?comps,? that appraisers?who are independent even though they technically represent the bank during a real estate transaction?use to base their valuation. The system is designed to keep everything fair and square for the buyer and seller while limiting the banks? risk. However, conservative appraisals based on the most recent sales?deals made prior to the bounce?can inadvertently stall an otherwise healthy recovery.
To get around these appraisals, more and more buyers are using cash for the purchase and paying more than what they could have gotten with a mortgage. The practice has caught on so drastically?with cash deals accounting for 40 percent of all sales?that the latest national data shows a major reversal in the price of cash deals as they relate to mortgages.
According to RealtyTrac, the average sale price of cash deals has increased almost 10 percent from $331,762 in July 2012 to $362,617 in July 2013, while financed deals have dropped off from $350,136 in July 2012 to $303,265 in July 2013. Historically, cash deals have been relegated to lower-priced offers as they were seen as an incentive for sellers who were willing to take less money in exchange for a quick, stress-free (mortgage-free) closing. Today, all-cash bidding wars are becoming more common.
This influx of cash deals, however, doesn?t always make it into an appraiser?s comp pool, skewing market realities and becoming a point of controversy.
?Cash investors are very aggressive,? says Mark Stark, CEO of Prudential Americana Group. ?This segment began pushing away mom and pop who just wanted a place to live in.?
Stark has seen a huge increase in all-cash deals in Arizona and Nevada. While all-cash deals have usually comprised 7-10 percent of his business, he says that over the last 18 months, they have grown to 21.5 percent. A lot of this, he says, is due to institutional investors who have come into the market to take advantage of the low prices.
Speculation, bidding wars and rising home prices are generally seen as signs of a healthy economy, but Stark thinks that too many borrowers are being left out of the market due to overly conservative appraisals. The problem, he says, is that many appraisers are not taking these cash deals into account when they determine the value of a property ? even though they are perfectly valid comps.
Appraisers will often throw out unrealistically low sale prices, such as those that result from a foreclosure or an arm?s-length transaction, when conducting an appraisal. They also throw out prices that are unrealistically high. But many real estate agents don?t think this should include cash deals from institutional investors.
John Brenan, director of appraisal issues at The Appraisal Foundation, a private nonprofit recognized by the government as the source for appraisal standards and recommendations, says that while the appraisal industry is regulated, there are still a lot of gray areas when it comes to comps.
He says that high comps should be thrown out only if they don?t truly reflect fair market value. An institutional investor should not be disqualified as a comp just because they?re a fund or someone who is looking to lease or flip the property. Brenan says an unusually high cash sale would get thrown out if someone paid significantly higher than what others recently paid for surrounding properties without a good reason.
?If someone paid an extra $50,000 on a property because it?s the exact color they wanted,? says Brenan, that would not be a realistic example of the market and shouldn?t be counted as a comparable property in the appraisal.
On the other hand, appraisers shouldn?t be using foreclosures or REO properties as comps either, Brenan says. Still, a block full of short sales can?t just be ignored when gauging the marketplace.
?That (bad) sale in and of itself does not make a market, but it does play a role,? explains Brenan. ?Appraisers are not out to establish value. They?re out to reflect the marketplace.?
Brenan adds that appraisers should be looking at the most recent data available, but that might not necessarily include current events such as a big company expanding its workforce in the neighborhood or an inventory shortage. Part of the tension has to do with the fact that appraisals represent a fixed point in time ? what a house is worth on a particular day. It doesn?t always leave room for the greater economic trend.
?The appraiser is working off historical data,? Blefari says. ?If it?s a cash deal, they should use it as a comp.?
Blefari emphasizes that the market has so much pent-up demand right now that it will drive prices higher through the end of the year and beyond. He says the recovery is completely genuine and appraisals need to reflect that.
There is also a mechanism for appeal if someone wants to dispute an appraisal, and Blefari says he does it quite often.
Some states even have appraisal grievance boards that can serve as a mediator. For more information on appraisals, visit http://www.appraisalfoundation.org/
Andrew King is an award-winning journalist with 15 years of experience with the Gannett newspaper company, appearing in The Journal News (Westchester, NY), Asbury Park Press and USA Today. He also contributes to The Real Deal, TheLadders.com and TechPageOne.com.