Mike Klijanowicz: Under-appraisals
Today's guest poster: Mike Klijanowicz, a real estate agent with Long & Foster in Perry Hall who has been the top individual producer in his office in listings and sales since 2008. He brings thoughts from the field on an issue that can slam the brakes on a transaction.
He works mainly in and around Baltimore, Baltimore County and Harford County, with clients ranging from first-time buyers to investors.
Take it away, Mike:
A few short years ago most people never thought that their homes would ever "under appraise." Back then home prices were only going one way -- up. However, in today's tumultuous real estate world, under appraisals are becoming more and more common. With all of the foreclosures and short sales that have flooded the local real estate market and the many more thousands that will be released eventually, it continues to have a dramatic impact on non-distressed "normal" residential property values.
With the current HVCC (Home Valuation Code of Conduct) rules and regulations regarding appraisals and home value calculations, appraisers continue to be under an intense pressure to not "over inflate" the properties' value. Those HVCC rules and regulations that went into effect two years ago are still causing serious ripple effects in today’s marketplace.
In reality what we see happening now is very few/none of the appraisers seem to want to set the new high sale comp in a neighborhood. The buyer and the seller may have mutually agreed on a price that was $20,000 higher than what the appraiser determined the value to be. However, if the only comparable sales were from "distressed" properties (short sales, foreclosures, etc.), they brought the overall value in lower.
If this trend continues, how will property values ever increase if appraisers continue to be pressured to not set the new high sale comp in a neighborhood, even when it is the best home in the neighborhood? And whatever happened to rule that the fair market price is determined by what a buyer is willing to pay?
In every year prior to 2010, none of my transactions ever under appraised. In 2010 I had three transactions under appraise, and so far in 2011 I have already had one under appraise with another one pending (but we are keeping our fingers crossed on that one).
Unfortunately, most of the time in residential real estate transactions in our area, the appraisals are not completed until the contract of sale has already been negotiated between the buyer and the seller. Usually it is also completed after the home inspection(s) and any repairs or credits are negotiated as a result of the inspection(s). It should be noted that most of the time the buyer has already paid for the inspections and if the transaction doesn't close, they will not get that money back. When the appraisal comes back under the purchase price, the under appraisal problem begins.
On one hand you have a seller who feels that they have already given enough (often a significantly lowered sales price, a hefty seller contribution, and several items to repair from the home inspections). Then on the other hand you have the buyer who doesn't want to overpay for the home, but still wants and/or needs the same seller contribution from the original contract of sale, and also wants all of the repairs completed that have already been agreed upon by both parties to be completed. At this point, the negotiations start all over again.
Under appraisals are just another obstacle that needs to be overcome in order to get to the settlement table in today's real estate market. Hopefully if you hired a real estate agent who is an excellent negotiator and on top of their game, they will be able to help you work the deal out and get everyone to come to another compromise.
BOTTOM LINE IF YOU ARE A BUYER: Make sure you put in an appraisal contingency with your purchase contract so you are protected in case the appraisal comes in under the agreed purchase price. Depending on your financing, you may automatically have that clause as a contingency. When in doubt, you should always consult with a real estate attorney.
BOTTOM LINE IF YOU ARE A SELLER: Be prepared to negotiate some more if your home comes in under value since most buyers are not going to be willing to pay over the appraised value of the home. You should also know that depending on the type of financing your buyer is using, the value of the appraisal could be fixed to your property for a minimum period of 90 days. It does not matter if you get another contract for more money from another buyer if they are using the same financing program as the original buyer.
Have you experienced an under appraisal? What happened? Were you happy about it or did it ruin the deal?
Thoughts, questions, arguments? Comment away.
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