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!