High Appraisals Signal Change

By Kenneth R. Harney
Saturday, September 22, 2007

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.

Are some sellers giving in to lowball offers, fearful that they can do no better because of the subprime mortgage implosion and home-sales bust? Or are appraisers simply lagging behind downward market adjustments?

"We're seeing it a lot now," said 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, when appraisals often came in at or occasionally below the contract price.

"I think buyers are pushing very, very hard," Yamato said -- and they're walking away with steals.

Appraisers insist that their value opinions are based on hard numbers: recently closed comparable sales, current comparable listings, pending sales, statistical trend 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 Patrick Turner, an appraiser in the Richmond area. "We can't just make it up" to hit a contract price, he said.

"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 pressure.

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 copies of the appraisals, but the sellers do not. If it indicates that 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 news to them.

"It certainly puts us in an uncomfortable position when we find that the selling price is below market value," said Karen J. Mann, an appraiser in the San Francisco area. "We wonder what's going on out there. Are sellers giving in to the bottom-feeders?" she said, referring to people who troll for hints of distress or urgency.

The rapid contract-price changes in some areas raise a fundamental question for sellers and buyers: What is true market value? One simple definition might be whatever an arms-length, ratified contract says it is, adjusted down for whatever concessions or inducements the seller includes in the deal. For example, if a contract is for $250,000 but the seller is paying $10,000 in closing costs, the market value should be $240,000.

Another approach incorporates a time element and is used by corporate relocation specialists who resell the houses of transferred executives. Relocation firms often ask appraisers to project what the property would sell for in specific time periods. 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 in a shorter time.

Not all appraisers are surprised that appraisals are beginning to come in above contract prices. Gary T. Crabtree, president of Affiliated Appraisers in Bakersfield, Calif., said bloated 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 said, 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 sales.

Frank K. Gregoire, an appraiser in St. Petersburg, Fla., and chairman of the Florida Real Estate Appraisal Board, said that "when the market is moving" -- up or down -- appraisers "have to look not only at closed sales and current listings," but also have to tap into sources of dynamic information, such as real estate agents who specialize in the micro-market where the property is, and who know how fast the inventory is building, where the concessions are buried, and what is motivating 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 hourly or set fees. The top professionals often carry the senior residential appraiser, or "SRA," designation and can be found through the nonprofit Appraisal Institute's Web site ( http://www.appraisalinstitute.org).

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.


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