Appraising property in today’s market
The last time I wrote about appraising residential properties, I called the job of a bank appraiser as much of an art as it was a science because so much of the appraisal process was dependent on intangibles. Since that was more than three years ago I had no idea how really difficult the job of appraisers would become in a declining market rampant with short sales and foreclosures.
If you’re selling your property and one of the terms in the contract of sale is a contingency for a mortgage on the property in a specified amount, you essentially don’t have a solid deal until that contingency is met. This is where the appraiser working for the buyer’s lender comes in, and believe me this is not an easy job.
Professional real estate appraisers use what are called comparables as part of the evaluation process. Comparables are similarly appointed properties that have recently sold nearby which provides a basis from which the appraiser can add or subtract value for differences in the property being appraised compared to the comparable.
In a normal real estate market, this can be a challenge in locations where homes and locations are not all the same. Anna Maria Island is a perfect example of an appraisal nightmare because the Island has everything from 1,000 square foot cottages built 50 years ago to 6,000 square foot elevated homes built recently, sometimes right next door to each other. In addition, evaluating waterfront properties creates its own special problems, since not all waterfront properties are created equal and waterfront views can be subjective.
Now, however, even the most qualified appraisers are really having a difficult time. Foreclosures have driven sale prices down and there are fewer non-foreclosure sales for appraisers to use as comparables. In addition, because so many homeowners are in financial distress homes may be sold below their value. Therefore, establishing the value of a property that is fair to the lender, the buyer and the seller is extraordinarily difficult for appraisers.
When a property does not appraise and is short of the agreed upon sale price, there are all kinds of issues that have to be addressed. The buyer may feel he is overpaying, the seller may feel the appraiser has made a mistake and the lender may decide not to grant a mortgage. In a situation like this both parties to the sales contract can legally walk away from the sale. However, there could be a remedy if the buyer and seller are open to negotiation. For example, the seller can lower the agreed upon selling price thus reducing the amount of the mortgage required, or the buyer could come up with a larger cash down payment requiring a smaller mortgage.
Another option would be to request the appraiser to reevaluate his findings or ask the lender for another appraisal. However, unless there is a gross error on the part of the original appraisal in a substantive area like square feet, number of rooms, age of comparables or property size, it is unlikely an appraiser or a lender will change his opinion.
Keep in mind that it is perfectly acceptable for a homeowner or his agent to advise appraisers of neighborhood information he may not be aware of. The condition of other properties sold as well as the motivation of other sellers in the area can be vital information in forming an opinion of value. A good appraiser will appreciate the additional input.
Appraising real estate is a dynamic process; it changes almost on a daily basis presenting significant challenges to all parties to a real estate transaction. So pity the poor appraisers. I’m sure they never knew they would have to live up to Picasso.