Real Estate Round-Up: Appraisal – checkmate

The real estate transaction is complicated. There are multiple participants, there are multiple disclosures and reports, there are multiple points of negotiation, and there’s the appraisal.

Appraisers are a bit like the wizard of oz. They have all the levers, they hide behind the curtain, and they decide what you get. We all know how that worked out for the cowardly lion, the tin man, and Dorothy. The wizard gave them what he determined they needed and sent them on their way. It wasn’t until they returned and discovered that the wizard was just a man behind a curtain, that the wizard was exposed.

In the good old days, mortgage brokers had a group of appraisers that they regularly worked with. The lenders had relationships with appraisers who understood custom homes and those that understood track homes.

The lenders worked with appraisers who understood the coastal communities and those that understood the rural communities, and much like Realtors, they would utilize the services of the appraiser that had the most thorough knowledge of the specific type of home in the specific community it was located in.

The Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) became a federal law in July 2010. It required that the relationship between lender and appraiser be arms-length.

For a while, even Realtors, were being held at arms-length, so no one could accuse anyone of undue persuasion. This arms-length component was a product of abuse by lenders leading up to the 2008 great recession.

Listen up, the abuse was from a very few who ruined it for the many. The abusers sold homes, plain and simple. They made the numbers work, so buyers purchased homes, regardless of whether they could truly afford to purchase that home. Legitimate lenders help qualified buyers purchase homes they can afford.

This history lesson leads us to today. Many of you know that the inventory of homes for sale is historically low. Basic supply and demand says that when there is not adequate supply to keep up with the demand, prices for the product goes up. The buyers drive the prices up, not the producer, or in the case of the home, the seller.

Think of gas prices. When there is an abundance of oil, gas prices drop. When oil is in short supply, gas prices rise. In the month of August, detached homes in Fallbrook sold for 98.6% of their original list price.

The median price of a detached home in Fallbrook in August was $622,500 which is 10.8% higher than August 2019. The average price of a detached home in Fallbrook in August was $686,318 which is 7.1% higher than August 2019. Prices are climbing and buyers are willing to pay the higher price. Supply and demand are a major component affecting these numbers.

Enter the appraiser. First the good news. We have had a few purchases where the lender has waived the appraisal. That is a good thing unless the buyer offered more than they really wanted to pay and was hoping that the appraisal would come in lower.

However, for most buyers and sellers this is great news. It is one less variable to contend with. Appraisals generally are performed on all purchases. With VA and FHA loans there is a document that the buyers and sellers sign stating that the buyers do not need to proceed with the purchase if the appraisal comes in below the agreed purchase price.

VA and FHA will only lend based on the appraised value. In all other cases, appraisal is a contingency for the buyers and provides a reason to not proceed with the transaction if the sellers and buyers cannot come up with a resolution on a low appraisal.

This is the thing; all appraisals are not created equal. Appraisers are tasked with finding properties that have similar characteristics as the property being purchased. Appraisers attempt to find properties that are a half mile from the property and closed escrow within the previous six months. That’s a task in today’s market.

Inventory is so low, that appraisers must look outside of the half mile radius but do try to stay within the six-month criteria. Appraisals are, however, subjective. There is no road map to create the final value.

We recently had an appraisal completed on a purchase of one of our listings. The appraiser submitted his report and determined that the appraised value and the purchase price were the same. Everyone was elated. Some time passed and we received notification that Fannie Mae was reviewing the appraisal and was going to send out a new appraiser to review the value.

This appraiser did not contact anyone. This appraiser did a “drive-by” appraisal and proceeded to bring in the appraised value $70,000 below the first appraisal. The transaction went from being smooth to “in trouble”.

It was resolved only after extensive negotiations that included the option for the buyer to get a new loan with a new lender, who would then get a new appraisal, or cancel the escrow.

Fortunately, the existing lender was able to get approval for a third appraisal. That appraisal was completed and just like the first appraisal, brought the appraised value in at the purchase price. There was a week’s delay, but disaster averted.

Why am I making you aware of this scenario? Inventory is low, prices are rising because demand remains high. Appraisals may be a problem. There are solutions if the parties wish to work to find one.

With VA and FHA, the solutions are more difficult to find. With conventional financing, there is always a solution, which could include, the seller lowering their accepted price, the buyer bringing in more cash to close the escrow, the parties meeting somewhere in the middle, or even having a new appraisal completed.

In the hands of a knowledgeable, experienced, professional Realtor, you will feel empowered and educated to be able to make the decision that is right for you. We look forward to helping you navigate this ever-changing real estate market.

Kim Murphy can be reached at [email protected] or 760-415-9292 or at 130 N Main Avenue, in Fallbrook. Her broker license is #01229921, and she is on the board of directors for the California Association of Realtors.