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VOL. 42 | NO. 45 | Friday, November 9, 2018

Appraisers push back on rising housing valuations

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Various trends develop as markets transition, and a new one in the Nashville market is the failure of homes to appraise for the contract sales price.

Appraisers in the area have had difficulty finding comparable sales, and that’s understandable since prices have spiked over the past five years. Each day seems to brings higher and higher prices for similar houses.

Yet, somehow the appraisals have consistently met the contract sales price, even when the numbers exceeds listing prices by tens of thousands of dollars.

Perhaps the appraisers have had all they can stands and they can’t stands no more, as Popeye liked to say, but many houses are missing the mark lately.

It is difficult to argue with the cold, hard facts when the appraisers have the data to substantiate their decisions. The appraisal form is as thorough as any document involved in residential real estate transactions, as well as one of the best values.

Following the Great Recession, Congress mandated that lenders begin to use appraisal management companies to prepare their appraisals. Most have a Member of the Appraisal Institute designation.

One lawmaker suggested that MAI stood for “made as instructed,” and Congress felt that appraisers were meeting the sales prices utilizing whatever means necessary. Many lawmakers felt this practice led to inflated values and played a key role in the crash of the real estate market.

In order to curb the transgressions, the Congress began to regulate the industry by adding a layer of bureaucracy to the appraisal process. This did not work and still haunts the market. Lending became more regulated during the Recession, and home buyers were forced to meet more rigid requirements in order to obtain loans.

The stringent lending guidelines suddenly forced buyers to invest real cash – their own money – into the real estate transaction when 100 percent loans evaporated. The loans securing residential real estate made during the past six years have remarkably low foreclosure rates, thus saving Realtors thousands of calls from amateur investors seeking foreclosures.

Additionally, Congress felt the need to modify the closing process, and offered the Dodd Frank Wall Street Reform and Consumer Protection Act as the cure. That has failed miserably on that front as closing attorneys can only wince and apologize as they make their way through the convoluted closing disclosure, for years known as the closing statement. Now things are disclosed, not stated.

The lending regulation modifications were sound, the closing reconstruction was ridiculous and the appraisal management company system is flawed. As government intervention goes, one out of three is not bad.

As for the appraisal management companies, there might have been issues in other markets, but Nashville appraisers have always been fair, ethical and straightforward.

Appraisers are increasingly gaining work in foreign lands, most of them in the wild, wild west of the city, those neighborhoods where teardowns are hitting the $500,000 mark.

One of the area’s best agents works with Village and she has four sales pending with appraisal issues in The Nations, Devon Park, Hillsboro Village and Green Hills. Her worst was the Green Hills appraisal.

Last week, she explains, an out-of-area appraiser determined a house in an area that commands high dollar-per-square-foot sales prices sold for $36,000 more than the listing price. It seems he had decided the house in question was not worth what the buyer had paid before he left his home far way.

For one of his comps, he used an HPR (horizontal property regime) citing the “A” unit as a comparable sale. A month after one side of the HPR sold, the other side sold for $10,000 more, yet it was not included on the report.

Rather than use the better comparable sale, he ventured across a major thoroughfare, down another major thoroughfare for about a mile and took a left and went into that region in order to find lower comparable sales and used three sales there.

If the real estate contract includes an appraisal contingency, and the appraisal comes in lower than the sales price, there are several remedies:

-- The seller can refuse to sell for the lower price.

-- The buyer can terminate the contract.

-- The seller can terminate the contract.

-- The buyer and the seller can negotiate a new sales price.

At that point, the inspection has been completed, the house has lost its momentum and there is a chance that the property might not appraise the next time it sells since it is the luck of the draw as to whether another appraiser with no experience in the area might appear.

In these cases, compromise usually works best as long as the buyer is convinced that the appraiser blew it. That is assuming that the buyer has the cash to make up the difference in the loan to value.

With the cooling market, multiple offers are a vanishing breed, and escalating sales prices are less prominent. As sales fall, appraisals often dip as speculators and builders sell in order to stop the bleeding on the interest, taxes and insurance they are paying on multiple tall, white houses.

Homeowners who are selling must wait as the new construction inventory is devoured.

Then lenders tighten their new construction loans while interest rates climb to 7 percent or so, sales drop, unemployment climbs when the construction industry slows and the stock market drops.

Then the Fed lowers interest rates, but not as low as before, demand increases, banks open their vaults to builders, unemployment levels improve. All is great.

Sound familiar? That is why they call them cycles.

Richard Courtney is a licensed real estate broker with Christianson, Patterson, Courtney, and Associates and can be reached at richard@richardcourtney.com.

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