First, let’s start with the basics. A residential purchase appraisal report is a professional, objective opinion of value. Although the buyer pays for the report it is meant to protect the best interests of loan originators, servicers and the underlying mortgage investors such as Fannie Mae. Of course, the term objective is a bit dubious because the appraiser gets a copy of the subject’s purchase agreement prior to completing the report. In 2019 the Federal Reserve stated that less than 10% of purchase appraisals came in below the negotiated purchase price and over 70% matched the purchase price exactly. While this may sound a bit corrupt the absolute definition of market value is, “The price a fully-informed buyer is willing to pay.” In the end this procedure typically works well for all parties.
On 9/1/2020, the Northern Nevada MLS reported 739 closed sales of single-family homes and condos in Reno & Sparks, in the month of August. 139 of those closings were cash transactions which do not typically include an appraisal contingency, the remaining 600 buyers obtained a loan and likely went through the appraisal process. I’m not sure how many of these transactions experienced low appraisals but I’m certain it’s well above the typical 10% failure rate. In this post I’ll discuss why this is so prevalent in our market today.
Low Inventory plus high demand: In some price ranges and property types we’re seeing an average market time of less than 5 days from list to contract. Allowing for a couple of negotiating days this implies that many buyers have a total of 72 hours to see the house, prepare an offer and get it delivered. At that point, the buyer may discover that the seller has already received another offer or two, or seven (I wish I were exaggerating). After losing out on a house or two (or five) and rather than throwing in the towel, buyers often elect to make offers well over the list price. While this may get them into contract, they’re still on first base and the appraiser will be waiting on third in every financed deal.
Appraisers are in short supply: Some have recently retired, others are taking a break due to health concerns. Those remaining active can be very choosey about the appraisals they accept. I’m finding that many of our most seasoned, reputable appraisers are simply not accepting certain, particularly lower-end deals, that may expose them to one of two negative scenarios: #1) Value comes in low hence everyone including principles, brokers and mortgage company are disappointed in their work. #2) Value comes in at the agreed upon price but the numbers were stretched a bit by factoring in the frantic market conditions. There could be some consequences for the appraiser by opting for the latter. Should the home go into default in the future, the appraiser and report will be audited in a very thorough manner. Both scenarios are much less of a risk in the higher priced transactions, those deals come with deeper pockets.
Limited Historical Data: New escrows virtually died in February and March of this year. Things picked up in April and May then got shockingly busy in June. Today our market is appreciating at an unprecedented pace and a house that closed escrow just 90 days ago did so under very different circumstances than those closing now. Buyers only see what is on the menu today while appraisals are primarily focused on the previous 6 months. Assuming the demand remains high, this will continue to be a challenge for the foreseeable future.
I’d like to announce that my new business plan for the remainder of 2020 is to focus on cash buyers purchasing new construction…. Alas, I have got to make a living which requires that I work with buyers and sellers, across many price-points. With that in mind I’ll be writing a second post next week describing some tips for avoiding low appraisals and strategies for dealing with it should you get one. Until then, stay safe. dan@nvhomeconnections.com.