Tuesday, July 2, 2013

The Appraisal Conundrum and "Murica"

This has been an interesting year so far. February was the busiest month I’ve ever had while June was somewhat leisurely. There was activity, yes, but nothing like the activity in February and March. The market is at an interesting turning point as well. Buyers are buying and sellers are selling. Appraisers, however are not always giving value. 

I had a contract fall through because an appraiser would not give the contract price on his appraisal. The thing is, we were under contract on that home in 5 days at list price and had a backup offer the next day for $2,000 less than list. The appraisal came in $10,000 short. Seems to me the market told us what the house was worth, the appraiser disagreed and it all fell through (that family cannot sell for at least 6 months). He told us there were not sufficient comparable properties to show the value. I told him that is why the price is higher, there hasn’t been enough inventory--supply and demand--basic economics.

I know this is a conversation that is a little difficult to stomach after the mess we were in, but a home is worth what someone is willing to pay for it. I understand that a big part of the problem was a “bubble” where people got into a buying frenzy and drove up prices. There has to be a balance though. If a market is going to recover, values have to go up. It’s sort of like when you first graduate college and look for that first job. They all want experience. If you can’t get hired due to lack of experience, how do you ever get experience? Same thing here. If you can’t get value due to lack of comparables, how do you ever get comparables to improve the market?

On a completely different note, today is July 4th, America's Independence Day. On days like today I think about how divided people are in this country but yet how united we are. Democrats think Republicans are heartless, Republicans think Democrats are socialists, Independents and Libertarians think they are all crazy. Even with this division, we are all Americans. We have common background. The vast majority came from immigrants (at some point in their lineage) and made this country what it is today--good and bad. Its our country and it is something to be celebrated. It was an experiment in government and, even though it isn't perfect, its better than any other system. Enjoy the holiday and at least for today, forget your "side" and just be an American. Go "Murica"


Anonymous said...

This new market worries me. Why? Because I believe it is false.

When the investors pull out, and more sellers enter the market, and prices STILL rise, then I will believe that the real estate market is on the rise.

You said sellers are selling. That is true, however, LESS sellers are selling. There are more buyers. But those buyers are competing against investors, who will eventually pull out of the market as the prices rise to the point that it no longer becomes good financial sense for them to invest.

Then what?

Your seller and their buyer still had options. They could have come down in price. The buyer could have made up the difference if they had the ability, and if they chose.

There are always three parts to the equation. A house is worth what someone is willing to take, what someone is willing to pay AND what a bank is willing to loan. Just because supply is low, it doesn't necessarily mean that a house is actually worth more.

The problem with pushing the limit based upon supply and demand is that there may not be many other buyers out there willing to pay that price. Pushing the envelope on pricing is dangerous for the bank, who ends up holding the bag if the buyer defaults.

As to the 6 months, they can still hold out for a conventional or cash buyer.

Jonathan said...

Good commentary but I disagree a bit. Inventory is low but sales are up. In other words, there are more sales this year then there were last year and it is speculated that there would be even more if inventory had kept up with increased demand. So, overall inventory was up and sales were considerably more vigorous. Inventory did not keep up with demand though.

As for investors, investors are, by and large, snapping up the "fixer uppers" at a discounted price and are thus driving up the prices of short sales and foreclosures. In fact, there is a sort of "mini-bubble" forming in that submarket. It is becoming increasingly difficult to find low priced fixer uppers and the prices of foreclosures are approaching the prices of "normal" properties.

In my particular scenario, the sellers could not come down in price as they were already a bit upside down and the extra $10,000 made it impossible for them to sell. They are literally unable to make the sale due to their financial position. I am in no way playing them up to be "victims" per se, just that appraisals are not keeping up with the actual market trends right now. In my scenario there were actually 2 buyers willing to pay the list price (or very, very close). You are correct in that they could hold out for a conventional or cash buyer but there are numerous reasons this would have been a fool's errand. The home would have just sat there accumulating days on the market and eventually being "stigmatized". You know as well as I do that the longer a property sits, the more people say, "hmmm, what's wrong with that place?" The chances of us getting a cash or conventional buyer at the higher price is small.

I agree that pushing the envelope is dangerous for the bank but I still go back to my original question, how does a market improve if an appraiser won't let it?

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