Are New Appraisal Rules Derailing Home Sales?

June 25, 2009

Are property appraisals that are based on valuations from months ago derailing home sales that are on the verge of closing?

In her Local Address blog, Elizabeth Razzi writes that is exactly what is happening:

“There’s a Catch-22 that always arises when home prices start to increase near the end of a recession. Even though buyers are willing to pay more, appraisals often come in lower than the agreed-upon price because they’re based on comparable sales from three to six months earlier, when prices were bottoming. Real estate agents and mortgage brokers say it’s happening now, and that it’s disrupting sales.”

Razzi notes that one of the reasons that things may be worse than in years past is because of new rules from Fannie Mae and Freddie Mac that prevent brokers from ordering an appraisal directly from the appraiser. Instead, they have to go through the lender, who uses management companies to find individual appraisers who are often inexperienced and can make costly mistakes in the appraisal.

We have heard of at least two sales so far that have fallen through because of incorrect appraisals. We suspect there are more out there.

7 Comments

Mike Kiefer said at 4:02 pm on Thursday June 25, 2009:
Great article…..I am in the middle of a sale that has just collapsed because of this very issue.

Paulie said at 4:23 pm on Thursday June 25, 2009:
I think the reverse is true - the appraisal process is preventing agents from hyping buyers into purchases above market value. This quoted blog suggests that the appraisals are wrong, because they are based on months old valuations. I would proffer that the market has not changed fundamentally the market of 3-6 months ago. The realtors and home sellers would like to get buyers to believe this, but the reality is not supporting this marketing effort.

I applaud appraisers who are choosing not to contribute to irrational exuberance this time around.

Lauren said at 1:28 am on Friday June 26, 2009:
I agree with Paulie; I think it’s good that caution has returned. Especially with low downpayment loans, it’s risky for banks to lend in a declining market, which DC still is.

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CondoAuthority.com said at 11:49 am on Friday June 26, 2009:
A purchase price that is WAY higher than the appraised value is one thing, but if a buyer is willing to pay $5,000 more for a home that is right for them, even though comparable sales suggest the price should be slightly lower, they should be able to do so. Otherwise, how will prices ever rise? If the buyer is under no duress, why can’t they pay a little more for the home they want? Every piece of real estate is unique. And, this is a home we’re talking about, not a widget that came off an assembly line.

Paulie said at 2:02 pm on Friday June 26, 2009:
CondoAuthority - A buyer can overpay for his real estate. No one is stopping them - unless they are borrowing the money, in which case an appraisal must be based on fair market value, and not include overpayment. The bank can loan against a fair market value, if a buyer is willing to pony up the cash difference, and thereby remove the risk to the lender.

Lauren said at 4:10 pm on Friday June 26, 2009:
Paulie, I think that’s well said.

CondoAuthority, keep in mind the house is the collatoral for the loan, so the bank needs to make sure it’s actually worth the amount they’re lending. This is especially important with FHA loans that might only have a 3.5% downpayment, and house prices are falling at a rate faster than 3.5% a year. And yes, every property is unique and appraisals are not an exact science, but in a declining market it’s best to be conservative and err on the side of under-appraising.