By Andrew King
To get around these appraisals, more and more buyers are using cash for the purchase and paying more than what they could have gotten with a mortgage. The practice has caught on so drastically—with cash deals accounting for 40 percent of all sales—that the latest national data shows a major reversal in the price of cash deals as they relate to mortgages.
This influx of cash deals, however, doesn’t always make it into an appraiser’s comp pool, skewing market realities and becoming a point of controversy.
“Cash investors are very aggressive,” says Mark Stark, CEO of a real estate group that has seen a huge increase in all-cash deals in Arizona and Nevada. While all-cash deals have usually comprised 7-10 percent of his business, he says that over the last 18 months, they have grown to 21.5 percent. A lot of this, he says, is due to institutional investors who have come into the market to take advantage of the low prices.
Speculation, bidding wars and rising home prices are generally seen as signs of a healthy economy, but Stark thinks that too many borrowers are being left out of the market due to overly conservative appraisals. The problem, he says, is that many appraisers are not taking these cash deals into account when they determine the value of a property—even though they are perfectly valid comps.
Appraisers will often throw out unrealistically low sale prices, such as those that result from a foreclosure or an arm’s-length transaction, when conducting an appraisal. They also throw out prices that are unrealistically high. But many real estate agents don’t think this should include cash deals from institutional investors.
John Brenan, director of appraisal issues at The Appraisal Foundation, a private nonprofit recognized by the government as the source for appraisal standards and recommendations, says that while the appraisal industry is regulated, there are still a lot of gray areas when it comes to comps.