The first two people who looked at Daniel Skeen’s Grant Park home made offers. At the $475,000 asking price.
Skeen started planning his move. But when the appraisal came in $30,000 lower, it put everything in flux.
“It’s threatening to ruin this deal,” he said of the lower appraisal, which he feels is at odds with the marketplace. “When you have multiple people putting in full-price offers, that’s obviously what it’s worth.”
Below-offer appraisals have been more common than usual as the metro housing market pulls out of a deep slump. In some cases low housing inventory has led to bidding wars that push buyers to offer more than the asking price, leading to gaps of $30,000 or more.
The problem affects fewer than 10 percent of all offers, according to people in the business, but it is a factor in the market.
Lenders require appraisals when they make a loan, as a way to ensure the house, which acts as collateral for the loan, is worth the money they’re giving a buyer to purchase it. When appraisals come in below agreed-upon contract prices, buyers are not able to get loans for the full amount of their offer.
In some cases, the buyer has to make up the difference at the closing table. In others, the seller reduces the price. Sometimes the deal falls apart.
Appraisers, who charge a flat fee for their services and are supposed to independently assess home values, are in a tough place, said Daniel Fries, owner and president of the real estate appraisal and consulting firm Daniel Fries & Associates. The market is changing rapidly, and by their nature, appraisers are behind.
“Even though we’re trying to forecast and look in the future, we’re really looking at the past,” he said. “If I don’t use sales within 90 days, I’m not really representing the market right now. Within 30 days would be desirable, but we’re usually not that lucky. The more recent they are, the stronger they have been.”
After the housing bubble burst, appraisers were maligned for their role in substantiating inflated values. Now, many appraisers are erring on the side of caution as the housing market recovers, said Eugene James, Atlanta regional director of Metrostudy, a firm that tracks housing trends and data. It’s easier for them to defend values on the low side than the high side, he said.
As prices increase — in metro Atlanta, they were up 16.5 percent year-over-year in February, according to the latest Case-Shiller data — it can be harder for appraisers to follow the market. To reach their values, they compare sales of similar homes in the immediate area. But houses that sold six months ago may no longer be indicative of price trends.
“The market has shifted from a buyer’s market to a seller’s market, and it’s shifted pretty quickly,” said James Marks, the Atlanta managing broker for RedFin. “The way you’re winning a house is by bidding more than the next guy.”
The low inventory can lead contracts to come in higher than actual market values, causing problems with appraisals.
“There’s a lot of stress in that part of the transaction,” said Josh Moffitt, the president of Silverton Mortgage. “The gaps are a little more frequent and a little larger.”
Low inventory is also causing some real estate agents to sell their houses by word-of-mouth, without putting them on one of the area’s multiple listing services. Appraisers will only use properties that have had market exposure for comparisons, so the pocket listings, as they are called, exacerbate the problem by keeping more recent, higher-priced sales from entering the equation.
Some appraisers aren’t sure that the current increases are sustainable. A reduction in foreclosures has meant some of the lowest-priced sales are no longer part of the mix, but institutional investors who buy houses in bulk and with cash may be artificially boosting prices.
“When it just starts to change, it’s hard to see where the trend is going,” said Syrah Paul, an appraiser and the residential chair of the Appraisal Institute’s Atlanta chapter. “It’s kind of early. Six months from now, I think we’ll have more information about where we’re headed.”
Paul also noted home values are still falling or depressed in some areas, further complicating value-setting.
Appraisers have the ability to apply a market adjustment, and more are starting to adjust prices upward in response to the changing market, James said. But appraisers, lenders and real estate agents all have stories of homes that still appraised for tens of thousands of dollars less than the contract price.
“Buyers are overbidding to win the bid, but the appraisal is based on actual value,” said Corey Mason, the east Atlanta market manager for PNC Mortgage.
Banks lend based on those appraised actual values.
While some buyers know that they’re overbidding, and expect to come up with extra cash at closing, Moffitt said others are taken by surprise by the discrepancy.
When deals falls apart, other home sales can be scuttled as well.
“Several transactions depend on this sale happening,” said Bill Adams, president of Adams Realtors. “About 10 percent of transactions involve something like this. Every one counts.”
The rapid shifts — and new rules for appraisers — have added to the difficulties of appraising, Fries said.
New rules added in response to the housing crisis mean more comparable sales are required now, with more details about the properties. Lenders are no longer able to communicate with appraisers directly, to avoid exerting undue influence on their conclusions. Third-party management companies are often tasked with sending appraisers to jobs, and some real estate agents contend appraisers can be assigned to unfamiliar areas.
“Intown, neighborhood boundaries are a big deal,” Adams said. “Some neighborhoods are going up faster than others.”
It’s crucial that appraisers keep up with the changing market, said Nancy See, president of the Atlanta Board of Realtors, because buyers and sellers ultimately determine market value.
Buyers can sign a contract for any number, whether or not the price is justified, said Blair Schultz, a certified general appraiser at Allatoona Appraisal and Realty. He said comparable sales are getting easier as there are fewer foreclosures and short sales on the market. More cash buyers, who do not have loan constraints, will start to push prices up.
“The appraiser’s job is to read the market; we don’t create the value of the house,” Schultz said. “It’s got to start somewhere. We’re just now starting to see the upward trend. We can’t make any big jumps yet. It’s not happening yet.”
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