I regularly speak at real estate offices around Portland, Oregon about appraisers and the appraisal process. Lately, variations of the following questions have been most popular:
“Are you seeing more appraisals than normal coming in below the contract price?” I do not have any quantifiable data to support it, but there is plenty of anecdotal evidence that this is true. I do not personally perform appraisals for purchase loans. However, one appraiser in my office has started checking comparable sales before accepting appraisal orders for purchases because he does not like to be a bad guy or deal with the challenges that often result from value that is below the contract price. Other appraisers I speak to are reporting similar stories about high numbers of “unsupportable” purchase prices.
“Why are so many appraisals coming in low around Portland right now?” A 2011 study by Yanling Mayer found that less than ten percent of all appraisals come in below the contract price. However, this number could be more than ten percent in Portland right now. Prices are going up particularly fast for many properties and market segments around Portland due to strong demand, very low inventory, and a sense of urgency among buyers. In addition to a hot market, this also marks the end of the seasonal spring jump when properties typically recover from winter lows and much of the annual price increase occurs in a short time. (This concentrated annual jump in prices is discussed in a previous blog post regarding the Average Case-Shiller Portland Index.) The quickly increasing Portland prices, combined with normal seasonal fluctuations can make it very difficult for appraisals to keep up. This is because appraisals are strongly dependent on closed sales. An appraisal done today might be based on the best available comparable sales that closed a couple months ago, but went pending a month or so prior to that. Even better comparable sales data might not be fully available because it has not yet closed. Market statistics for supporting market change (time or date of sale) adjustments also lag a few months behind, leaving an appraiser with estimated trends, projections, and feelings, rather than solid evidence for making a well-supported conclusion that lenders can feel confident funding a loan on. The good news is that typically price increases slow late in the summer and market statistics start to catch up with current sales. This means that there are likely fewer low appraisals for closings in late summer, fall, and winter months.
“What options do I have if my appraisal comes in low?” There are four alternatives if an appraisal comes in low on a pending sale.
Cancel the contract. The appraisal might be a wakeup call that this is not the best deal for this buyer. It might be time to find a different home to purchase.
Renegotiate the contract. Sometimes when an appraisal comes in low, the two parties can split the difference and make the deal work. However, this option can be painful for buyers or sellers.
Ask for a second appraisal. Some lenders are willing to order a second appraisal as long as there is evidence that the first appraisal is flawed. Lenders do not want to be accused of, “shopping for a value” by ordering appraisals until they get the value conclusion they want.
Dispute the appraisal. See question #4 below.
“Can an appraisal really be disputed?” An appraisal can be disputed successfully if it contains an error or if there is compelling evidence of flawed analysis. Most lenders or appraisal management companies have a formal dispute process that involves filling out a form and submitting it for review. In my career, I have had many people try to dispute my value opinions; a few have successfully convinced me to change my value. On one occasion, I thought that a comparable sale just up the street from the subject set a firm upper limit of value by being superior in most ways. However, the borrower had been in that property and pointed out some things about it that I had not been able to uncover in my research. Consequently, I was able to verify the new information and revise my value opinion. I have also been successful at disputing several appraisals done by other appraisers. The best way to dispute an appraisal and win is not by disputing the opinion, but by pointing out errors of fact and building a strong case for an alternate conclusion. Remember that a value below the contract price does not mean that the appraisal has errors. Here is a blog post on how to challenge an appraisal.
Did I leave anything out or do you want to join in the conversation? Let me know by commenting below.
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