Over the past five years, a disturbing amount of real estate transactions never came to fruition, even though a buyer was willing to pay the same amount the seller wanted—and the same amount that a mortgage company was willing to lend to the buyer. It’s enough to make a broker pull their hair out. The problem, in these cases, is the appraisal.
Candace Adams, president of Berkshire Hathaway HomeServices New England Properties, says appraisers have been “heavily reliant on comps, and conservative,” and one of the best ways to avoid a snag with the appraisal is to use all cash.
“An all-cash offer trumps an offer that includes a mortgage contingency as far as the terms of the agreement,” says Adams. “Sellers are more apt to choose an all-cash offer due to expediency.”
Since most homebuyers can’t afford to pay entirely in cash, the deal often comes down to the financing. The process is improving, though, due to recent loosening of mortgage guidelines and the fairness of appraisers, Adams says.
Appraisers are independent property valuation experts who are forbidden to collude with banks under strict guidelines that were passed in the wake of the financial crisis. They have no agenda other than to make sure the price is right. The problem, frustrated brokers have argued, is that they’ve been prone to mispricing properties over the past five years. As a result, the housing recovery in some areas might not have gone as smoothly as it should have following the crash of the late 2000s.
“We had a large percentage of distressed properties,” says Jon Coile, president and CEO of Champion Realty Inc. in Maryland. “Some of the short sale properties were pretty dinged up.”
In the early 2010s, part of the extra conservatism that depressed an appraised value could have come from appraisers looking to avoid the same overpricing mistakes that led to the crash. Some transactions were hampered by outdated comparable sales that were unreasonably low as a result of the panic and low sales volume at the time. Now, however, brokers are more optimistic and are excited to be working with appraisers again.
According to Coile, higher prices are being supported by higher comparables, and it just took a while for the market to churn through short sales, foreclosures and real estate-owned deals.
“A lot of that distressed inventory has been absorbed,” reports Coile. “There are more valid comps now.”
Another factor, says Coile, is that appraisers have gotten better at determining the values of local properties because more of them live locally and are familiar with the nuances of their territory.
After the crash, new codes of conduct were carved out of the Dodd-Frank financial reform regulation, which imposed strict separations between appraisers and mortgage companies. The idea was to prevent them from “flipping” scams that were fairly common during the high times of the mid-2000s. It worked by re-appraising and re-financing properties every few months at considerable mark-ups—and commissions—that were not indicative of true value.
One of the unintended consequences of the legislation, says Coile, was that appraisal companies would send appraisers from out of town into markets they were not familiar with, and it showed in their valuations. But now, Coile says enough time has passed and the kinks have essentially been worked out of the system. After banks stopped using appraisal companies that weren’t doing well, the appraisal companies got better at using local experts.
“It’s not perfect,” adds Coile. “We still have issues, but we don’t have as many as we did.”
Plus, brokers have a renewed importance in the process. They can provide guidance as to what comparables can be used in their client’s appraisal. It is merely a suggestion, and the appraiser has to verify everything independently. Still, a good broker should know all the relevant sales in their territory and be smart and strategic about providing them to appraisers.
As an example, Coile says a client could get burned by an appraiser who fails to distinguish between two different types of water views on the Chesapeake Bay. To the untrained eye, all water views might appear the same, but real estate is so hyper-local that a one-block difference in location could mean a 10 percent (or more) premium for a property. The broker who knows their market the best would be able to provide proof that supports an accurate valuation—one that is more of an “apples to apples” comparison to show what that water view is really worth.
Nick Segal, CEO and founding partner of Partners Trust in Los Angeles, says a good way to do this is for brokers to use land records that differ from the Multiple Listing Service. These off-market sales, such as for-sale-by-owner deals, wouldn’t be found easily, and it’s up to the brokers to know how to use them.
“As brokers, we can give appraisers more direction,” says Segal. “We are able to give some intelligence that appraisers may not readily know, and they can do their own research and get confirmation.”
Andrew King is an award-winning journalist with 15 years of experience with the Gannett newspaper company, appearing in The Journal News (Westchester, N.Y.), Asbury Park Press and USA Today. He also contributes to The Real Deal, TheLadders.com and TechPageOne.com.