The trouble with appraisals: How the wild market is making it harder to get financing

Anyone paying the slightest bit of attention to the residential real estate market these days knows one thing: It’s hot.

With record-low inventories and rock bottom mortgage rates, every day seems to bring a new piece of data pointing to a market on the move. The fast pace of change is being seen nationwide, from Boise to Boston and Miami to Minneapolis.

The rate of change is so fast, in fact, that one crucial piece of the homebuying puzzle is frequently being left behind: the appraisal.

“The market’s so insane that properties aren’t appraising for the purchase prices,” said Carrie Dorn, a Chicago-area real estate agent at Compass and a certified real estate appraiser at D&H Appraisal Service Inc.

Homebuyers lucky enough to win a bidding war for a property are increasingly running headlong into appraisals that don’t match — or even come close to — the agreed sales price, leaving them with limited ways to close the sale.

This can leave parties to the deal — the buyer, the seller and their real estate agents and lenders— frustrated, to put it mildly.

“We’re running into appraisers not wanting to be flexible with the market,” said one Atlanta-area agent who asked to remain anonymous. “They’re wanting to stick to prices-previous, and the market’s a little bit different now. …Appraisers are going to have to be just a little bit more flexible, because the willingness to pay, the demand, is there. Appraisers like to set the prices themselves instead of the demand of the market.”

Such characterizations understandably raise the hackles of the appraisal community. Five appraisers from across the country who were interviewed by Chicago Agent Magazine all complained that their role in the homebuying process is often misunderstood, especially in these heady times.

“Other market participants may say that the appraiser is ‘killing the deal,’ but our first responsibility is to our client, which, virtually 100% of the time, is the bank or the mortgage company or the lending institution that hired us to provide an appraisal,” said Lincoln Appraisal & Settlement Services President and Chief Valuations Officer George Demopulos, who is also the immediate past president of the Massachusetts, Rhode Island and Maine chapter of the Appraisal Institute, an industry group.

“Many of the lenders that are very upset with appraisals today, they will also be the first ones to sue when the market declines,” said Robert Mesner, principal and real estate appraiser at Mesner Real Estate in Royal Palm Beach, Florida. “Appraisers don’t make markets. Appraisers determine from market data what markets are doing and apply it to the valuation of the properties.”

The primary piece of market data Mesner is referring to is the comparable, or “comp,” which is a recently sold property with characteristics similar to the subject property. Given the pace at which home prices are rising, a three-month-old comp can seem like ancient history.

“The question is, where do you get data? From closed sales,” Mesner said. “So, when the market is jumping at the rate that it is right now, closed sales are based on something that happened previously. Therein lies the issue.”

For Mariella Massa, an appraiser and the CEO of Houston-based FinHous, the frustration people feel when an appraisal doesn’t meet sales price is an opportunity to educate others on the appraisal process.

“It’s not just us waking up on the wrong side of the bed,” she said. “We’ve just got to follow these rules. I think a lot of Realtors are getting hip to the square.”

Taking your time adjustment

One tool appraisers do have available in a fluid market is the so-called time adjustment or mark-to-market, in which the value of a comparable property is adjusted by the rate of appreciation (or depreciation in a declining market).

Demopulos pointed to the Boston market, where big tech companies — Amazon, in particular — have flocked in recent years to capitalize on the intellectual power of recent graduates of Harvard, MIT and other schools, driving up real estate prices in the process.

“Time adjustments must be used by appraisers to reflect the market,” he said. “There’s some appraisers I see — I do review work — who aren’t making time adjustments, and that’s concerning because they’re not reading the market and analyzing the market.”

Dan Fries, president and chief appraiser of Atlanta-area Daniel Fries & Associates Inc., agreed.

“We all have the same comps,” he said. “It doesn’t matter that the cost of lumber’s gone up. What matters to the appraiser is, ‘Where can you hang your hat?’ And if we can show the market’s gone up X percent a month, you can apply that. They probably wouldn’t be yelling and screaming as much if everybody would do that.”

Appraisal wavering

Others involved in the home-sale process also have tools, the appraisal waiver, in particular. Under this agreement, the buyer makes up any difference between the appraisal and sales price. It can be indispensable in winning a bidding war in today’s market, and would-be buyers without enough liquidity are often priced out by cash-rich competitors.
“It’s not a traditional market, because only the buyers that have the extra cash are able to be successful in purchasing,” Dorn said.

In other words, cash is king.

“What’s happening is Mr. Triple-A Credit with a lot of money will go in there and say, ‘OK, I’ll make up the difference,’ and your [Veterans Affairs] person or first-time homebuyer is going to get squeezed out,” Fries said.

The pandemic’s work-from-home phenomenon is also making liquidity more important, as residents of expensive gateway cities, realizing they don’t need to come to the office every day to work, take their Park Avenue equity to Main Street, or Biscayne Boulevard, as it were.

“If you were in New York City, the market values compared to South Florida are off the charts,” Mesner said. “There are many buyers who are coming in with cash offers, and that means that the buyers with mortgages are at a disadvantage. If the prices are bid up beyond what the historical market data can support, that means that the buyer has to come up with additional cash.”

Calling all would-be sellers

Going forward, appraisers expect the disconnect between appraisals and sale prices to shake out — eventually.
“There’s a light at the end of the tunnel,” Fries said. “In the next 60 days, when all of this closes, hopefully we’ll have a new comp base and better comps to draw from.”

In the meantime, people who have long considered selling their split-level but didn’t want to put in the effort to prep it for sale might want to seize a rare opportunity.

“If I had that house on the busy street, or with the shag carpet, or didn’t feel like updating the kitchen, now is the time to sell,” Fries said. “People are going to take you, freckles and all.”

4 Programs for Buyers Without a Big Down Payment

As buying a home is the biggest purchase most people will ever make, buyers will look to you, their agent, to help them navigate the complicated world of financing their home. For many buyers, finding the required down payment money is the most difficult part of the process. For others, it may be more helpful to find a program that allows them to borrow without putting a lot of money down. Fortunately, there are a number of assistance programs for homebuyers that can help to lower the substantial upfront costs of purchasing a home. 

Let’s take a closer look at some financing programs you can recommend to buyers who might not have a large amount saved for a down payment:

1. Federal Housing Authority Loans

FHA loans offer the opportunity to borrow money with a low down payment (as little as 3.5 percent) and still access competitive interest rates. Also the federal program won’t penalize your buyer for having a low credit score. In order to qualify for this type of loan, your buyer must: 

  • Have verifiable income
  • Be able to afford the housing payment and any existing debt
  • Save at least a 3.5 percent down payment
  • Have an established credit history
  • Have a FICO score of at least 580 to 640
  • Purchase a home that does not exceed FHA loan limits

2. Veterans Administration Loans

VA home loans help service members, veterans, and eligible surviving spouses become homeowners. These loans are provided by private lenders, such as banks or other mortgage companies. The VA guarantees a portion of the loan, thus enabling the lender to provide your buyers with more favorable loan terms. In order to be eligible for a VA loan, one of the following criteria must be met:

  • Served 181 days of service during peacetime
  • Served 90 days of service during wartime
  • Served 6 years of service in the Reserves or National Guard

3. Rural Development Housing and Community Facilities Program

Lesser known than its counterparts, this program is administered by the United States Department of Agriculture and is designed specifically for lower-income individuals who either live in a rural community or plan to move to one. This program helps buyers by providing a cash subsidy to borrowers or by guaranteeing a no down payment loan, known as a Section 502 loan. 

In order to qualify for this type of loan, however, there are a few stipulations that must be met: the home must be 1,800 square feet or smaller, it must be the buyer’s main residence, and the borrower must meet certain income eligibility requirements.  

4. State, County and Local Programs 

There are also other down payment assistance programs that can be obtained at the state, county, or even local level. These assistance programs most often come in the form of either a grant or a loan that is known as “silent seconds.” A silent second is a no-interest loan that also doesn’t require a monthly payment to be made. 

To help your client find and secure these types of programs in your area, you can turn to State Housing Financing Agencies. These entities are chartered by the individual states and were established to help local residents secure affordable housing. AgentEDU can point you in the right direction for finding market data in your area.

To learn more about how you can better manage the sales process for your clients, sign up for our course Preparing Homebuyers to Buy today. 

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