|Appraisal Issues Dash Seller’s Dreams||| Print ||
|Friday, 30 March 2012 14:12|
Real Estate Reality
By Carl Medford, CRS
Special to the Forum
With the market as hot and volatile as Hawaii’s Kilauea Volcano, sellers are sensing they have a window of opportunity. As reported previously, this spring’s market is off to its strongest start in years. Contrast tons of buyers with limited inventory and the result is multiple offers everywhere. We’re also back to standing in line to view certain listings.
While easy to understand seller’s hopes of cashing in with the current market, those looking for sudden windfalls need to understand market mechanics. Many, seeing hordes of buyers, have priced their properties above market averages and watched in glee as multiple offers pounded prices up even more.
Newsflash: many homes going into escrow at escalated prices WILL NOT appraise at those inflated values. The reason is simple: We’ve been in a declining market. Due to the first-time homebuyer credit, we hit a peak in April, 2010; and, once the credit expired, we’ve seen prices eroding slowly every since. Appraisers have grown used to the declining market; and, in the past 12 months, appraisals have been, overall, at or close to contract values.
Appraisers use past sold prices to come up with current valuations. In a market suddenly spiking upward, they have no comparable sales to justify the abrupt price increases.
Consequently, many appraisals are suddenly coming in “under” the accepted contract price. In other words, appraisers are providing evaluations based on the market that has been, not the market as it’s suddenly become. While totally understandable, it’s bringing a new wave of frustration into the market as deals are falling apart everywhere due to low appraisals.
“This is a difficult issue to deal with,” explains John Petrocelli of Prudential. “Sellers, anticipating low appraisals, are beginning to demand that offers be written with the appraisal contingency removed. This might be OK with cash offers or conventional loans accompanied by huge down payments, but simply doesn’t work with 20 percent or less down or those with FHA or VA loans.”
If an appraisal comes in low, there are few options: lower the price, increase the deposit or cancel the deal. In addition, many buyers are refusing to pay more than the appraised value. And if it’s an FHA transaction, the appraisal, no matter the value, remains in effect for six months — placing a long-term stigma on the property.
Suddenly, it’s “Seller beware.” Not a pretty picture; but, as of today, it’s the current real estate reality.
Carl Medford is a licensed Realtor with Prudential California Realty in Castro Valley and a licensed general contractor. This article is sponsored by the Central County Marketing Association at www.ccmgtoday.com