If the appraised value comes in lower than the contract price, did the appraiser do something wrong? It’s easy to think the appraiser has been negligent somehow if the contract price is not met, but that’s not necessarily true. Appraisers have been getting slammed lately by the National Association of Realtors among other sources for “low appraisals”. There are certainly horror stories and situations where botched appraisals have killed a deal. Believe me, I know this from many relationships I have with investors and real estate agents in the Sacramento area. That’s exactly why I’ve given tips for challenging a low appraisal. But let’s remember that negotiations are normative in real estate and a list price and contract price are not necessarily a reflection of value.
Case-in-point: I appraised a flipped property in Elk Grove recently and my appraisal came back close to $10,000 below the contract price (but still above list price). While this is frustrating for the seller or listing agent, there was no ill-intent or agenda on my part. I could be blamed for bringing down the housing market and stalling a recovery, but I simply interpreted the market in this case. The lender’s appraisal department actually agreed with my appraisal too as we talked in-depth about why the appraised value was reasonable. Recent sales in the neighborhood did not support the contract price, current listings did not support the contract price, I did not use distressed sales for comparables (those were far lower than equity sales) and even offers on the subject property supported a lower value. The seller ended up accepting the highest offer – an FHA offer asking for closing costs back. All other offers were conventional or asked for no closing costs, and they all came in near or lower than the appraised value. The type of financing is not a definitive point for establishing value, but buyers not using their own money tend to make higher offers, don’t they?
Don’t forget to point the finger at the market: It’s interesting to me that appraisers are often blamed for a lack of recovery in the housing market. I wrote two days ago about the increase in the percentage of short sales in the 95757 zip code of Elk Grove. While this is encouraging news on some levels (less foreclosures), short sales also tend to sell lower than traditional sales, which means the housing market is ultimately weighed down if short sales represent 39% of all sales in a given zip code. Short sales usually have to be priced more aggressively to generate interest and/or close quickly before foreclosure. Some banks are not easy to work with either, which can also impact pricing too. I’m not saying at all that appraisers are not to face blame for shoddy work, but when the market has a total of 66% of all sales being foreclosures or short sales (as in the case above), it’s important to keep in perspective just how much the market is driving property values.
My points: 1) Give blame when it is due; 2) Market > Appraisers.
What do you think? Does this seem reasonable or am I off my rocker? What are the factors helping and hurting our housing market right now? What role do you see flipped properties playing in the housing market?