Lack of sales creates appraisal problems
Beauty may be in the eye of the beholder, but real estate value is in the opinion of the real estate appraiser, and forming those opinions have become the linchpin of the real estate market.
The practice of developing an opinion of value of real property is called real estate appraisal, and the real estate appraiser is the person who performs this task. Real estate appraisers are licensed by the state of Florida and managed by the Florida Real Estate Appraisal Board, which is within the Division of Real Estate of the Department of Business and Professional Regulation.
Point being that this is a profession which has always been regulated and is even more so since the passing of the Dodd-Frank Wall Street Reform and Consumer Protection Act. I'm pointing this out because it's important to understand the environment real estate appraisers are working in and why their job is so difficult and important.
In order for the real estate market in the country to really get up and moving, the first thing that has to happen is the banks need to start lending money again. In order to get a mortgage in today's financial climate, not only do borrowers need to have the financial means and a high credit score, but the property they want to purchase must appraise.
Appraisers provide a valuation service to lenders designed to be independent and impartial. The market value they determine is an opinion of the worth of a property at a given time in accordance with a specific definition of value. The market value is what the property should sell for in a competitive market, which is what lenders are primarily interested in knowing.
Although there are different methods of appraising property, the one most commonly used for residential real estate is the sales comparison approach. This method compares similar properties in similar locations with appropriate adjustments based on advantages or disadvantages of similar properties.
In order for this method to be effective, however, there must be an abundance of market activity and relatively recent sales of properties similar to the subject. And that is where we are having problems in almost every real estate market in the country. Because of the economic downturn and slow sales activity, appraisers are having a very difficult time finding appropriate comparable sales.
Frequently appraisers have no choice but to locate sales in areas that may not really be comparable to the subject property. Imagine using a three bedroom, two bath sale in northwest Bradenton as a comparable property to a three bedroom, two bath home on Anna Maria.
This becomes even more of an issue when the market starts to see more sales activity and possibly some appreciation, since the existing comparable sales occurred before the market started moving. This can result in properties under appraising and buyers not getting their mortgage approved unless they come up with more cash down or a lower selling price.
Unfortunately, this is the market place we're in right now, which could take several more years to work its way through. If you're a buyer who will ultimately need financing, be aware that it won't be an easy process. Even if you're qualified on every other level, you still have to fight your way through the real estate appraisal. If you're a seller, be prepared to think outside the box or to make some compromises on properties you really need to sell.
The most beautiful part of purchasing real estate is not the day you find the perfect home, it's the day the appraisal is done. That day is indeed one to behold.
