It happened again yesterday: The dreadful call from the buyer's agent that the appraisal has come in lower than the agreed upon sales price. For me this is the third time in five weeks, and I know I'm not alone in this.
Our industry tells us that market value is determined by what an able buyer is willing to pay for a property in an open market with an arms-length transaction. I have re-iterated this many times to my sellers, explaining that what they want to get for their property is irrelevant. It's what a buyer is willing to pay.
But the truth is, unless it's a cash purchase, it's what an appraiser determines the value to be. The issue with the appraisal process is that the appraisers only look at past sales. This is generally problematic in the month of July, when appraisers look at comps from January. Historically, sales tend to be lower in January (less demand) than during the summer moving season.
Now we have a market on the verge of recovery. Record low interest rates, low home prices and less inventory have created more demand. For the first time in years we're seeing multiple offers, back-up offers and escalation clauses re-appear. But in the end, the air is punched out of this encouraging situation by low appraisal reports.
I understand that appraisers have to answer to the scrutiny of the lenders and their underwriters, but how is our real estate market ever supposed to improve, if the new values aren't recognized and are being cut back to the level of the old sales? As long as appraisers are looking backwards, how can home prices move forward?
Low appraisals can be very devastating, as not all buyers are able to bring extra cash to the table, and not all sellers can accept drastic cuts in proceeds. When transactions fall apart this late in the game, the buyers have often already terminated their leases, sellers have started to move out, household goods are in transit and kids are already registered at new schools. For the brokers, weeks, if not months of efforts have been in-vain and they have to start again at point zero. But there is also a big impact on the rest of the community and the economy, as thousands of dollars in lost values are not being realized, resulting in lower proceeds, taxes and fees.
It seems we're in a perpetuating cycle of low past values impacting future values. There has got to be a better way to move forward.
Olympia Realtor®, GRI, ASP, SRES, SFR