The WSJ had this front page headline recently: Low Appraisals Upend Home Sales.
And, I thought – where have you been, WSJ? Then, I thought… I should blog about this because it is a great way to warn homebuyers about potential appraisal issues.
“IT’S ALL SO SUBJECTIVE”
So said a seller whose house appraised for $305,000, $30,000 under the $335,000 contract price.
Buyers and sellers often seem to think the appraisal process is too subjective, but I would argue that it is often far less subjective than they think.
Appraisers are constrained by appraisal guidelines that force them to correlate to closed sales only (and NOT to current market conditions).
Other guidelines they must adhere to include proximity, square footage and external influence, e.g. busy street, similarities.
Ironically – the process can seem “subjective” precisely because so many appraisers work so hard to come in higher than the closed comparable sales – which requires a lot of creative explanations on the appraiser’s part.
APPRAISED VALUE IS NOT MARKET VALUE
We all need to remind homebuyers that appraised values often do not reflect market values, as I explain in this blog: When Appraised Value Is Not Market Value.
I used an example where there were ten offers over $1 million but the highest closed comparable sale in the area was only $850,000.
So, the market value was clearly over $1mm (indicated by the numerous parties willing to pay that much) but the appraisal came in at only $850,000.
13% OF APPRAISALS CAME IN BELOW CONTRACT PRICE
Per the article, “About 13% of appraisals came in below the contract price in August, according to housing-data provider CoreLogic. That was down from a recent high of 19.7% in May but above 7.3% in January 2020, a rate CoreLogic said is more typical for the housing market.”
CoreLogic’s Chief Appraiser was also quoted as saying this: “I don’t remember any time where the frequency of buyers being willing to pay so much more than the market data was this high.”
25% OF BUYERS WAIVE APPRAISAL CONTINGENCIES
A whopping 25% of homebuyers are waiving their appraisal contingencies to entice concerned sellers to accept their offers. But, that number is down from 29% as recently as June.
IT GOES THE OTHER WAY TOO – WHEN THE MARKET CORRECTS
The article did not mention this, but my appraiser friends often do.
When the market softens or corrects a bit, properties often appraiser for “over the contract price” because appraisers can correlate to comparable sales that closed in a stronger market.
We see this happen often with sales that close in late fall or early winter in markets that are softer than the previous spring’s or summer’s.
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