What's going on with appraisals in some parts of the country? Mortgage lenders -- and appraisers themselves -- say they're increasingly coming in with valuations higher than the contract prices agreed to by sellers and buyers. The differences can range into the thousands of dollars.
Are some sellers giving in to lowball offers, fearful that they can do no better in the wake of the subprime mortgage implosion and home sale bust? Or are appraisers simply lagging behind downward market adjustments?
"We're seeing it a lot now," says Patrice Yamato, president of Plaza Mortgage Group in Jacksonville, Fla. "Appraisals are coming in higher than the contract" -- a reversal of the pattern during the housing boom years, when appraisals often came in at or occasionally below the contract price.
"I think buyers are pushing very, very hard," says Yamato -- and they're walking away with steals.
For their part, appraisers insist that their value opinions are based on hard numbers: recently closed comparable sales, current comparable listings, pending sales, statistical trendline analyses and adjustments for special features of the property and its location.
"We've got to use the most recent market data that is available to us," said Pat Turner, an appraiser in the Richmond, Va., area. "We can't just make it up" in order to hit a contract price. "If [the appraisal] comes in above the contract, that tells you something unusual is happening out there" -- perhaps too much property has been sitting unsold for too long, and some sellers are suddenly feeling time pressures.
Generally, appraisers perform their valuations for lenders to help determine whether the collateral -- the real estate securing the mortgage -- is adequate. The prospective buyers typically receive a copy of the appraisal but sellers do not. If it indicates they sold for less than the appraiser's estimate of true market value, they are none the wiser. Nobody in the transaction has any incentive to break the bad news to them.
"It certainly puts us [appraisers] in an uncomfortable position when we find that the selling price is below market value," says Karen J. Mann, a veteran appraiser in the San Francisco area. "We wonder what's going on out there -- are sellers giving in to the bottom-feeders" who are trolling for any hints of distress or urgency?
The rapid contract price changes under way in some areas raise a fundamental question for sellers and buyers: What is true market value anyway? One simple definition might be: It is whatever an arms-length, ratified contract says it is, adjusted downward for whatever concessions or inducements the seller packed into the deal. For example, if a contract is for $250,000 but the seller is paying $10,000 of the buyer's closing costs, the actual market value should be $240,000.
Another approach incorporates a time element and is used by corporate relocation specialists who resell the houses of executives transferred from one part of the country to another. Relocation firms often ask appraisers to do projections on what the property would likely sell for within specific time periods -- 90 days, 60 days and the like. A house that might reliably sell for $400,000 during a 120-day listing period might well have to be priced lower to guarantee sale within a shorter time period -- say 60 days.
Not all appraisers are surprised that appraisals are beginning to come in above contract prices. Gary Crabtree, president of Affiliated Appraisers in Bakersfield, Calif., says bloated sales prices over the past five years, plus hidden concessions and fraud, "have distorted the data" and the public records in some parts of the country.
"When mortgage fraud and concessions get built into" local recorded sales prices and tax assessments, he suggests, those inflated values "become the new comparables" that appraisers use. In effect, hard-bargaining buyers today may be squeezing some of the cotton candy fluff out of prior sales.
Frank K. Gregoire, a longtime appraiser based in St. Petersburg, Fla., and chairman of the Florida Real Estate Appraisal Board, argues that "when the market is moving" -- up or down -- appraisers "have to look not only at closed sales and current listings," but tap into sources of dynamic information, such as realty agents who specialize in the micro-market where the property is located, and who know how fast the inventory is building, where the concessions are buried, and what's motivating active buyers.
Serious sellers can protect themselves against lowballers and vultures by hiring an experienced appraiser before listing. Though they rarely advertise it, many appraisers are willing to conduct independent appraisals for homeowners for modest hourly or set fees. The top professionals often carry the "SRA" (senior residential appraiser) designation and can be located nationwide through the nonprofit Appraisal Institute's Web site, appraisalinstitute.org.