Appraisals Stop Some Home Sales as Market Heats Up

WINDERMERE, Fla. – April 1, 2013 – A young couple, both doctors, thought they had themselves a deal when the owners of a Windermere house agreed in January to sell it for $460,000 – $15,000 below the asking price.

But then the property appraisal came back for $130,000 less than the buyer and seller had agreed the house was worth. That killed the deal.

“My buyers went and bought something else,” Lake Mary real-estate broker Nancy Pombo said. “And those people who were selling that house were looking at buying another house – they wanted to downsize.” Instead, they took the house off the market.

“It’s like a chain reaction,” she said, “and it’s affecting buyers and sellers.”

Mortgage companies routinely require appraisals on home purchases to help ensure that a lender can get its money back if a buyer later defaults on the loan and the lender has to sell the property. But appraisals are particularly challenging in a fast-changing market, such as the current one, because they are based on previous sales.

In the core Orlando market, for example, resale prices have risen more than 10 percent in just the past six months – more than they usually increase during an entire year when the market is stable.

“Buyers and sellers are agreeing to prices that haven’t been supported with current sales,” said Brian Watkins, president of Accusured Management LLC, a residential-real-estate appraisal-management company based in Longwood. “The appraisal may be $4,000 down from the sales price, and each side [buyer and seller] ends up compromising on something.”

No one tracks the gaps between appraised values and contract prices on home sales, but in a survey released in January of 3,586 real-estate agents nationwide, about 10 percent of the agents reported sales that had been canceled during the previous three months because of appraisal problems; 10 percent also reported that sales prices had been driven down by appraisals; and 10 percent blamed appraisals for delaying some deals.

Appraisers know that home values are rising again, but they’re reluctant to demonstrate that in their appraisals for fear of push-back from lenders, according to the survey, issued by the National Association of Realtors.

Joyce Potts, a longtime Orlando appraiser, said the industry has come full circle from the days leading up to the peak of the frenzied real-estate market in 2007 – a time when banks sometimes suggested to appraisers what the value of a house should be so that the loan would be approved.

“Most appraisers didn’t know how to start if they didn’t have a prescribed number to hit. … When banks were rewarding appraisers for hitting the number, it exacerbated the [housing] bubble,” Potts said.

“Now we’re going in the entire opposite direction.”

Appraisal reforms swept the nation in 2009 after New York State’s then-attorney general, Andrew Cuomo, filed a complaint against an appraisal company, which ultimately led Fannie Mae and Freddie Mac to implement what they called the Home Valuation Code of Conduct.

The code sought to distance appraisers from lenders by putting “appraisal-management” companies between them. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 replaced the code with standards that now allow lenders to establish their own appraisal-management firms, though the law continued to call for a firewall between appraisers and lenders.

New homes for sale can be particularly challenging for appraisers because newly built houses have been increasing so much in price.

“With low interest rates, builders are trying to expand their profit margins. And the cost of labor has gone up because there are not as many people available to do the [construction] work,” said Sean Calegan, owner of A.A. Appraisals Inc. in Oviedo.

Also, buyers are often willing to pay a premium for a home that is completely new and can be customized, he said. But appraisers, to protect against a builder setting artificially inflated prices within a new-home community, will use resold homes and houses sold by competing builders as the comparable sales in their report, he added.

Watkins, owner of the Longwood appraisal-management company, said homebuilders complain that it’s unfair for appraisers to set the value of a new house based on prices paid for nearby foreclosed and “short-sale” homes. But some areas are so saturated with such distress sales, he said, that they do define the neighborhood.

“If the market is riddled with foreclosures, then that’s what’s setting the market pace,” he said. “The rule of thumb is: Whatever the majority of sales are, that’s what you’re going to try to use for comparables.”

ATomas Consulting

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