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Appraising Homes in a Declining Market...What you need to know for your Clients

Prior to these past 1-2 years, it has been a long time since Appraisers have had to deal with appraising homes in a declining market. Lenders really hate it when we mark the dreaded declining market box or the oversupply box or note that the days on market is over 6 months . But we are checking those boxes more and more these days.

As for how we define declining markets, well that may differ from appraiser to appraiser or location to location. We define declining market when we look at the sales prices of the same or similar homes in the prior year and see that they sold for more than they are selling for in the current year, this is considered a declining market.

Some appraisers note a declining market if they see a decline in the sales prices over the past 2 quarters of that same year. But it is important to make sure that this decline is not just a CORRECTION in the market. Big difference here.

When the neighborhood has experienced increases over the past several years, many of the current listing prices reflect this annual appreciation. However if the homes are not selling and the sellers reduce their listing prices to prior year list prices and they wind up selling for the same or similar price as the prior year, then we define this as a STABLE market, not a declining market.

As you likely know, if lenders see that the property is in a declining market they will not approve the loan. If the amount of the down payment is significant, then they may approve the loan. So you need to know how they are handling loans in a declining market before you waste your time finding a home for your client. While YOUR CLIENT may qualify for the home loan...the HOME does not qualify for the loan. In the "old days" the banks figured the homes would appreciate, so the qualifying process was pretty loose, but not anymore, both the borrower and the home are under great scrutiny.

Another thing to be aware of is condition. Lenders DO NOT like to see Average-(minus) on an appraisal report. So if you have a seller that has a home that needs to be cleaned up, painted, landscaped, etc. make sure they do this before the appraiser arrives or their deal could be killed by the appraisal report. As you well know, now more than ever these homes have to be neat as a pin to even compete in this market.

Another important thing to be aware of: If the home has been listed in the past 12 months this information must be reported on the appraisal as well as details of the listing, days on market, etc. also the past 36 months of sales history for the subject property must be noted on the report. So if you have a home that was listed 6 months ago for $150,000 and the appraisal comes in at $170,000 without any renovations or additions having taken place, the underwriters are going to kick this one back big time wondering how in the world the home appraised for $20,000 more than it was listed for just 6 months ago, especially now.

Some lenders will not even approve a REFINANCE loan if the home was recently listed and most will not approve a loan at all if it is currently listed. So people need to think twice about listing their home, just to test the market because if the market fails them and now they want to refinance, they may be out of luck.

The best thing you can do for your clients is to get them prepared for all contingencies on the buying and selling side. The last thing they or you like is surprises!

I know it is very tough in this market to make things happen and get to the closing table, but as long as you know all of the obstacles upfront, the better prepared you are to handle anything that comes your way.

Good luck to all of you and may this market turn around soon!

Posted by Mary Thompson Lake Lanier Appraiser in Georgia on 10/25/2008 04:21 PM

Comments (51)

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51 Comments on Appraising Homes in a Declining Market...What you need to know for your Clients

OCT

2008

I have been very good about figuring out the home value - until recently. There is so much variation from one lender to another, on appraiser and another and from community to community -- it is virtually impossible to get a good handle on this. I talk with local appraiser and lenders to stay on top of trends, but it is very difficult and very frustrating for everyone concerned. I love it when I see an appraisal that indicates the market is "stable"! There have been a few of those lately.

Great information! Thanks. I could use what you wrote for some of my newer, younger clients. I am currently a full time real estate agent in Ogden, Utah. I quit appraising in 1996 after 10 years of operating my own business. I am familiar the craziness that occurred in 1987 housing crisis in California and why the 'crisis' last a few years. It was unbelievable to witness what some homeowners exhibited during those times. For instance, I remember inspecting a home for a lender to establish fair market value for a pending short sale and potential foreclosure. The homeowners had refinanced with maximum cash out a few months prior. As I walked through the dining room, I noticed a set of current blueprints on the table for a new home they were building. Yep! Another lender duped during the prior refinance with those homeowners. Sad, but homeowners pulling maximum cash out happened a lot back in 1987. I am more cognizant about the relationship between sellers' motivation and lenders scrambling to resolve loan issues in our current times!

I survived the crisis in 1987 and I will survive the 'perceived' crisis we are experiencing now! Good luck to you to you, as well.

Thank you for the information. We have noticed a huge tightening in commercial in the actual value of the property. Having clients understand this would be very good. I will pass this one around thank you.

Great post and I like how you point out the difference between declining and correcting. I see a lot of appraisers using actives which cannot be a good sign.

Great info Mary, I didn't even think the banks would turn down a loan in a declining market. That is so news worthy I will be on the phone Monday seeing what the lendrs I do business with say is their policy.

great article i am currently buying alot of properties in Ga in the fulton county area. do you think the properties there are going to continue to decline i am buying them at the 20-50k range.

Thank you very much for the information.

Mary......but what about all the foreclosures? They are selling right and left and a lot of them are in need of many repairs, cleaning, removal of junk, etc. I am sure the appraisers are having to make notations on those also.

Great post Mary and very interesting and elightening. Some information that I wasn't really aware of.

Mary, great post I'm a realtor/appraiser and it is very difficult in the declining market to make decision on pricing. I keep my appraiser license current but have not practiced in about 1.5 years. The appraisals have been coming up short for about 6 months in Michigan. Jane

Mary,

I keep telling sellers that from what I see is that by the time they get a contract...the property can be worth less when it gets ready to close. It's hard to keep chasing the market.

Thanks for the post. This is the kind of drilling down to basics that the industry needs. How can realtors survive if they dont learn to adapt to these difficult circumstances. Everyone can make money in good times but only the strong will survive the economic hiccup that is headed our way.

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Great information as always. Congrats on being featured (now I've got to write a few more posts to keep up :-) ) !

Great information, still hard to convince some sellers of the market corrections, they for some reason think it does not apply to their homes! They do not really get it that we also have to sell the price to the appraiser.

Hi Mary, great info. Maybe I missed it, but could you define a CORRECTION in the market? You identified a declining market and a stable market. I'm curious how you determine if it is a correction in the market. Thanks~

First let me say, Thank you so much for your comments and I am thrilled as this is my FIRST featured post! I am humbled by the selection. Thank you AR!

Sara: Thanks so much my fellow appraiser for letting me know I was featured, I was out having dinner, pulled up my email and saw all the comments on my post. Very exciting.

Darla:Correction in the market is when people have to reduce and sell their homes at the price they were selling in the previous year. So even if they started out at say $150,000 and had to reduce the home to $120,000, but that same home was selling for $120,000 in the previous year, they just went thru a correction in the market, not a decline. Also it is considered Stable in this example. Hope that helps to clarify.

Gobal Market Realty: As for Fulton County, South Fulton, west side of Atlanta and other areas, things are grim, prices are falling, but if you are buying them in the price ranges you noted, I should think you will do well on these properties, depending upon what you need to do with them to sell them, but again at that price you cannot go wrong.

Roxanne: As for foreclosures the loans are usually for rehabbing of these homes and the lenders know the condition upfront. We do indicate what the condition is and any issues with these foreclosed homes in our reports, however, if it is an investment loan, where they plan to renovate and then resell, the lenders typically want a "subject to (repairs) value rather than an AS-ISvalue and that is how they have been able to do these type of loans. Hope that answers your question.

Neal: Yes, in that situation an appraiser needs to make an adjustment for MARKET conditions, if they feel that the homes are declining that fast from contract to closing.

What a wonderful and informative post. I am in the Los Angeles and sorrounding area and we have a significant amount of short sales and reo's. They are definitely driving the current market. Loved your post. Thank You!

Mary, I would think that this has got to be a very tough market for you. I had heard that some banks are requiring 3 appraisals. Are you finding that so?

Some very good information for all of us.

thanks for taking the time to write it.

Some very good information for all of us.

thanks for taking the time to write it.

Some very good information for all of us.

thanks for taking the time to write it.

Great information... It is not a good sign when the same home starts selling for less..

OCT

2008

these declining appraisals have become a self-fulfiling prophecy here in many parts of greater phoenix like a domino effect

Great post. I am planning on reblogging it in a few days and emailing the link to my clients. They definitely need to have this information. Great job.

THANKS FOR THE HELPFUL INFORMATION. I HAVE A QUESTION. ...WHAT IF YOUR AREA HAS BEEN DESIGNATED A "DECLINING MARKET" AS HAS ALL OF LOS ANGELES COUNTY? THIS IS A CONUNDRUM AND ONE THAT HASN'T IMPACTED ME YET, BUT I HAVE TWO IN ESCROW THAT I HOPE WILL APPRAISE!

THANKS!

Mary, There's some very helpful tidbits here for REALTORS to remember too when we're doing CMAs. In my signature I have the code of ethics "REALTORS shall not, in order to secure a listing, overstate the value of a property." Some REALTORS (and appraisers) tend to do just that to make the seller or lender happy. BAD BAD BAD. Thanks for a great blog and God bless you.

Very good information....

Hmm...but wondering how this applies to a short sale....very often it is because a realtor has lsited the house...make that bought the listing....and added the past debts and listed the property at what the seller)s HAD to have....that the home becomes a short sale....we do quite a few...to date, thankfully, this has not happened....and would not have guessed that the practices of buying listings would have such an influence.

Good info - but I think GA is a bit different than MA - We've been declining for a while now - For a while the stigma of a town being in a declining market (just about all towns/counties around here were) it was a messy deal to get a loan and could require an add'l 5% down - That seems to have eased up or they now are reconsidering what counties/towns are declining - I can't keep up with it ...

Thanks for your input!

I recently had a potential buyer pay for a new appraisal on a property before we make an offer. The property has been on the market almost TWO years and it is a unique waterfront property. The appraiser had to work hard to come up with a number that would work. The appraisal is with the bank now to see if they will accept the number. If they do THEN we are going to write the offer. The sellers were okay with the process as they don't have anyone else look at this home priced close to 1M.

Thanks for all the kind words on this post. I can see that there are alot of questions and ones which I can continue to address in future blogs. Glad that some are re-posting the blog or sending it onto those who may benefit.

A couple of comments I would like to address: Declining market appraisals becoming a self fulfilling prophecy in certain markets. Appraisals do not drive the values, the market drives us to determine values, so our process only reflects what is happening in the market, not the other way around

As for appraisers making the NUMBERS work....This is BAD, BAD, BAD, this is part of what got us in this mess to begin with, appraisers who just appraised to the sales price or estimated value amount and did not appraise based upon what the market would really bear for that property. So if you ever come across an appraiser who says, what number do you need to make it work....watch out! That is all I will say on that subject.

As for short sales, it really boils down to what the lender is asking of us on our opinion of value. We look at the terms of the loan in our appraisal process, but bottom line is if they want a true opinion of value as opposed to a "fire sale" value, this is what we will provide and advise them of the current market conditions in the process. If they want a fire sale value, then we adjust for this and that means the value is going to be lower as they want a value based upon a quick sale of the property.

I do think that banks are getting used to declining markets in their loan process, but usually at least here, you still have to have more money down or the loan to value ratio has to be lower in order to get a loan in a defined declining market.

Most of the counties in Georgia at one time were defined by the banks and powers that be as a declining market and some lenders were trying to force the issue with us to mark all of our appraisals in these counties as declining. There lies the problem, the banks telling the appraisers what to do as they have in the past with pushing us for values. How can an out of state bank know which areas are declining and which are not? As it turns out in our area, it can get as specific as neighborhoods that are declining and others that are not. So the appraiser must really know the area and review the sales and listing thoroughly to determine if they are dealing with a declining market

***If you have an appraiser coming from another part of town or different county to appraise a property, you need to make sure they are very familiar with that area and many times they are not, so the value could be flawed!

As for people getting appraisals BEFORE they make an offer, we see that more and more and I think it is an excellent idea to protect yourself. We are seeing buyers and sellers get appraisals before they list or purchase. Smart move!

Thanks again all for your kind comments and I am so glad I could be of assitance. More to follow!

Thanks for the podt here. I have had this problem on two seperate occassions, one got through with another lender and the other fail through. But we are in tough times so here we are.

Excellent post ! Good info - the process is critical and protects the parties. I used to scream and shout when the appraisal would come in low and many times, would "win" with the number being adjusted. Recently (in the last year or two) that scream and shout approach does not work as well : )

The difference is that I understand the process more and respect it. So instead of screaming and shouting I try to do what you recommend - plan ahead : )

I'm always amazed at what great information I find on ActiveRain, and your post does not disappoint, Mary. You gave me some information I didn't even realize I had no clue about. Thank you.

I am so very happy that this post is helping so many people. Who knew! More to come.

Mary

Another issue for appraisers in a declining market is not only the declining home values, but the tightening up of available credit. I can see lenders using appraisers who appraise values conservatively over those who appraise liberally.

Mary, Great info. I have subscribed to your blog and bookmarked it for further info. Currently renting a property considering purchasing, in a declining market, on the market for over three years, in need of some repairs, old over 250 years and high tension wires not on the property but on both sides and across the street. What are your thoughts?

I have had this work against me. Buyers are getting appraisals before writing offers. So then, nothing goes because it's an argument because they say the bank is not going to give them the loan. I'mlooking for a 'stable' area!

Thank you, This is great information. I will forward information onto my clients. Any little correction could help in a higher appraisal.

Hi Mary: Even though Realtors know that real estate values have generally declined this year, it is very interesting to see it through an appraiser's eyes. Thanks for sharing.

Colleen: I am of the same opinion, at least I hope lenders have learned their lessons. It really is nice taking assignments when the lenders give you NO pressure and just let you do your job and on the rare occasion that they want a conservative value, well that is quite a refreshing change of pace.

Not saying we should appraise properties LOWER than what they are worth, but it sure is nice to be able to report the TRUE and real value of a property WITHOUT complaints about the value.

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Many of you may want to revisit my post on the new HVCC regulation they are working on that will come into effect in 2009, assuming it passes and it looks like it will in some form or another, which can impact your business and will impact the appraisal process greatly.

HVCC-will-affect-YOUR-business

As for buyers wanting appraisals ahead of time, well the HVCC will affect this. The lender will likely need a new report anyway as they will not be able to use one that a buyer brings to them any longer. As for buyers getting them just for their own purposes they can certainly continue do this. If it kills the deal, I am sorry, but the buyer is just being prudent and smart and protecting his potential investment in the property. When acting as a buyers agent, I would assume Realtors would want their buyers protected?

Christine: I do not know what price range you are in, but if there is any chance of this going FHA, forget about it because if the high tension poles or wires are within "fall distance" (in other words if the pole/wires were to fall, would they hit the house) FHA will not insure the loan.

Also being as old as it is, appraisals of this kind of property are difficult at best and lenders may not agree with the report, unless there are plenty of other really old houses to compare it to. You are in a declining market and the home has been on the market for so long, so unless you are getting a STEAL, at first blush, this does not sound like a good investment for you. You have to think of the future and how hard it might be to sell this home down the road. Hope this helps!

Cheryl: Thank you! We do see things differently sometimes, it is just the nature of the job.

Excellent post. It is sometimes hard to get that across to clients. I think we have hit bottom thank goodness!

Thanks Mary

Very good info, Instead of CMAs I have started using absorption rates to help price a home as well.

Rich

Charlotte NC

HI MARY!

I caught this post on a reblog from Marlene (from CT) and I'm glad that I did. You did an awesome job explaining appraisals. It's tough with this market. I'm going through some appraisal issues right now much like the example you gave of the home appraising for 20K less than it was listed 6 months ago. We'll see what happens.

I'd love to re-blog this one!!

Thank you!

Mary--That condition issue is something that could take some people by surprise as it was not a big deal previously. I have noticed that appraisers are noting around here. Good information! Thanks!

Reblog away everyone, it really seems to have helped those that stopped by to read and comment here.

Thanks again everyone! More to come.

Great post and graphics!!!

OCT

2008

Mary, I appreciate hearing from an appraiser's point of view. Some things like getting the place ready for the appraiser may seem like common sense, and can be easily overlooked, so thanks for the reminder and great information.

Great information here, this should be printed and laminated and handed to the sellers for them to understand as well. Thanks Mary.

Great post! Wish sellers would opt to have a pre-listing appraisal before hand from an appraiser like you! Understand valuation techniques is one thing, understand that the "market" also plays a role now, not just with buyers but also underwriters is a huge lesson.

Eva: Sounds good to me. Laminate away!

Joshua:Thanks! The market has always played a role or at least is should have! The market is what defines and determines the property values. Every thing we do is based upon market conditions. Underwriters continue to surprise me, some are by the book procedural fanatics and request things that clearly are not needed or do not apply in various markets and others could care less about the appraisal report, which is scary, but sometimes the underwriters are working in the production side of the bank and that should be outlawed!

This is great information...I just had a friend complain about her appraisal which was using short sales for comps...but there was nothing else that sold since before 2007 so that was it....sellers still have a hard time understanding that the market is not the way it used to be.

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