Like many young things, the housing recovery is suffering some growing pains, as appraisals lag rising prices and make it difficult for borrowers to get loans.
The problem, mortgage-data firm HSH Associates says, starts with the conservative appraisal standards implemented during the financial crisis. That is compounded by a natural lag in comparable-sales data. The result -- appraisals coming in lower than the price seller and buyer have set -- is a possibility both parties need to take into account as they enter this changing market.
"While low home values continue to be an obstacle in the way of a full housing recovery, more and more markets in recent months have experienced home-price improvements," HSH reports. "Although home prices are up in some areas, many real estate agents, homeowners and homebuyers alike are frustrated that appraisals aren't keeping pace with current home-price appreciation."
In places where the number of home sales remains low, appraisers do not have many recent sales to examine in establishing current values, HSH says. Relying on sales from many months earlier means using data that do not reflect recent price increases. Also, many appraisals are being done by out-of-town appraisers who do not have a feel for recent changes in the local market, HSH reports. It cites a recent survey by the National Association of Realtors that found 34% of Realtors reporting problems with appraisals in the past 12 months.
When the appraiser sets a value lower than the mortgage the buyer needs, the lender will deny the loan.
What can buyer and seller do?
First, they need to be realistic about prices. The seller, especially, should recognize that recent home price gains have been modest. People are enthusiastic about the housing market because it appears to have turned a corner -- because prices are no longer falling. That doesn't mean they're soaring.
Both parties can use sites such as AOL Real Estate, Realtor.com, Trulia and Zillow to assess prices from sales in the past two or three months. Be sure the homes are really comparable to the subject property, then use the comps to calculate a price per square foot that can be applied to homes in the neighborhood.
The real estate agent will also have thoughts on this. Each party should pick an agent who has been in the local market for a number of years and has lots of current listings and recent closings. Part-timers and newcomers won't have enough feel for the market to spot recent trends.
Keep in mind, though, that an agent has a financial incentive to encourage the seller to be "realistic" about price, or to ask a bit less. Most agents would prefer a slightly smaller commission for a home that sells quickly.
HSH suggests that the seller be present during the appraisal to point out value-enhancing features the appraiser may overlook. The seller can also give the appraiser a written description of the home's merits, as well as a list of comparable homes in the neighborhood that have sold.
Related: Inside the Mind of an Appraiser
Buyer and seller should study the appraisal closely, looking for errors, oversights or the use of comparable sales that aren't really comparable. If that doesn't work, the buyer can ask the lender to allow a second appraisal.
The buyer should be sure the sales contract includes the standard language canceling the deal if the appraisal comes in too low. A low appraisal thus allows the buyer to negotiate for a lower price.
Finally, the buyer, if possible, can offer a larger down payment, reducing the mortgage required to a level below the appraisal.
None of these techniques is a surefire way to get the deal done, but they could close a modest gap. As the process continues, both parties should constantly scour the market for fresh comparables -- data all parties can use to keep abreast of a market that could change quickly as spring approaches.
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