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Lower-value appraisals can chill property sales as market warms

June 30, 2013|By ARNOLD S. PLATOU | arnoldp@herald-mail.com
  • Realtor Cynthia Moler-Sullivan
File photo

The highest offer was $10,000 more than the asking price and the sellers were thrilled — until the lender’s appraiser said the property was worth $40,000 less.

In the meantime, about 20 miles away, a house that had been put up for sale for $500,000 in late 2012 attracted a recent offer “in the $460,000 range” that the owners were willing to accept, Realtor Cynthia Moler-Sullivan said.

“But the appraisal came in at $415,000,” she said.

“We were going to go to settlement next week. And now, what are we going to do?” she asked.

Moler-Sullivan, the listing agent on both properties, has appealed the appraisals. But, she said, if the appraisals aren’t overturned and the deal falls apart, “they’re going to lose all that money (that) ready, willing and able people were going to pay to buy” those properties.

“It’s painful for them,” she said of the sellers. “I understand what’s going on, but it’s painful.”

Lower-value appraisals are disrupting many real-estate deals these days as the market warms up after years in the recessionary deep freeze.

Potential buyers are beginning to offer more money for houses, but the appraisals that lenders need to justify mortgage loans don’t always match those increases.

So the deal can collapse.

“The buyer walks, or the buyer coughs up more (cash), or they renegotiate and the seller eats more” of the loss, said Bill Reidel, senior instructor for the Maryland Association of Appraisers.

The choices are tough — and so, too, has been criticism of appraisers, according to Reidel and two Hagerstown-area appraisers.

Bill Bowen and Steve O’Farrell, president and vice president, respectively, of William G. Bowen Inc., a longtime residential and commercial appraisal company, said parts of the situation frustrate them, too. They said some of the appraisers who lenders are choosing are out-of-towners whose appraisals have been way off the mark because they don’t know the local real-estate market.

Citing a recent case, Bowen asked what an appraiser from Baltimore County knows about Washington County.

Reidel said appraisers are being criticized by buyers, sellers, real-estate agents and lenders for ruining deals, just when the housing market is starting to look better.

“I’ve heard it all: ‘Why are you throwing water on everything? It’s awful! Spoilsport! We just got the punch bowl out and now you’re ruining the party,’” Reidel said.

But Reidel said the appraiser’s job, guided by federal regulation, is to analyze the market by looking at such factors as historical price data, present-day trends and, sometimes, area development plans to determine “what would the typical buyer pay for this property.”

The huge amounts of value that properties lost during the recession illustrate the importance of an appraiser’s role, he said.

“We’re sort of a leveling factor,” Reidel said. “We’re always looking at historical trends, but we’re not supposed to be pouring gas on the fire, either.”

An appraiser’s job done well can, for instance, keep a buyer from paying and borrowing more than is sustainable.

“If we overappraise it and then the value isn’t there, then it’s all of a sudden (the buyer’s complaint), ‘How could you let me do that?’” Reidel said.


Prices edge up

Though still far behind the high-dollar prices paid seven or eight years ago, this year’s rising prices are welcome news to many in Washington County’s real-estate market.

The years before the nation’s 2007-09 recession were boom times. Fed by easy loans, many Americans bought houses and, as demand rose, prices shot up.

Median prices soared countywide from $149,900 in 2003, to $176,500 in 2004, to $225,000 in 2005, to $231,750 in 2006, according to data from Metropolitan Regional Information Systems Inc. (MRIS).

In general, the median price measures the midpoint in the range of selling prices, so a few high-ticket deals don’t skew the result.

Back then, many Realtors were making a lot of money, Moler-Sullivan said.

“We thought we were all rock stars and (during the recession), we found out we weren’t,” she said. “Who would know the value would drop like that?”

Simply put, the values plummeted when interest rates on many of the new mortgages rose and sales fell. As values dropped, many homeowners — suddenly owing more than their houses now were worth — were financially trapped. The situation is what’s called “being under water on your mortgage.”

So short sales, foreclosures and bankruptcies became common.

The median price on houses sold here fell to $220,000 in 2007, to $195,000 in 2008 and to $167,750 in 2009, MRIS data shows.

The recession officially ended in June 2009, but amid the weak national economic recovery, the county’s median sunk even further, to $149,900 in 2010 and to $138,000 in 2011.

Last year, drawn by low-interest rates, first-time homebuyers boosted sales of houses in the $100,000-to-about-$150,000 area of the market. Slowly, the market has grown stronger this year, with an increasing number of sales in the $200,000-and-up bracket, MRIS data shows.

As a result, the county’s median price has continued rising in most months.

This year in January, February and March, the median price of houses sold increased from 1 percent to nearly 12 percent over those sold in the same month a year ago. In April, the median price jumped to $175,000 — 25 percent higher than the $140,000 median in April 2012.

However, in May, the prices of houses sold settled down again. They fell 1 percent to $157,500 as compared to the median price of houses sold here in May 2012.


Some signs of health

Nonetheless, the month’s other signs still look healthy:

• In all, 151 houses were sold. That’s 79 percent more than the 84 sold in May 2012.

• Total sales rose to $25 million, compared to $15 million in May 2012.

• Sales were coming faster. On average, a property sold here in May had been on the market for 91 days, whereas the wait in May 2012 was 110 days and during the recession, in May 2009, was 160 days.

• On average, sellers weren’t having to cut their prices as much. In May 2009, for instance, the average sale price was just 83 percent of the average list price. By May 2012, the average was 90 percent. And by last month, the average had improved to 93 percent.

One reason that housing prices are up is that the county’s supply is short right now, according to Betty Hays, president of the Pen-Mar Regional Association of Realtors, which has more than 500 members in Washington County and in Pennsylvania’s Franklin and Fulton counties.

“If a buyer has very specific needs, it’s hard to find them a property because our inventory” is relatively low, Hays said.

Last month, just 637 houses were for sale here, Hays said. Given that 151 were sold, that’s only about 4 1/2 months of inventory, she said. A six-month supply generally is considered healthy.

“Sales were up, but a lot of homeowners are not putting their homes on the market because they’re under water,” Hays said. “Many people who would like to move up (to a more expensive house) right now can’t do it because if they bought in 2006, 2007, market prices aren’t meeting the 2006, 2007 level yet.”


Drawing comparisons

Bowen, who has been an appraiser for 40 years and was the first chairman of the Maryland Appraisal Commission, which regulates appraisers, said his company is careful to gather information about every property sale in the four area counties where it works.

“We know what’s going on. We know what the market is,” Bowen said.

Even so, given what’s happened in the economy, it’s difficult, he said.

Appraising a property involves many factors, including what are called “comp sales.” These are the prices paid recently for comparable properties — those similar to the one that’s being appraised.

With fewer sales since the recession, it generally is harder to find comp sales, especially in the higher-end market. So, Bowen said, his appraisers look for comparable neighborhoods in the other counties it studies “and then draw a parallel.

“And for us, because we do this every day, that tells me the property is worth a million, two (for example). And I can demonstrate it. I’m confident. But the problem is the lender will say, ‘Give us three more comps in the neighborhood,’” Bowen said. “Well, it doesn’t work that way.”

Bowen said that looking at the comp value isn’t always enough in the sort of rising market economy that seems to be boosting home prices here now.

“If you have a willing seller and a willing buyer, then we need to look very diligently at the marketplace to see whether this (comp values) is a problem,” he said.

In residential appraising, most lenders request that all of the comp sales be within the last 30 to 60 days, but in times of slow economic recovery, usually the sales aren’t happening fast enough, said O’Farrell, who is a current member of the state appraisal commission.

And even now, there have been “periods where there was a disproportionately high number of short sales and distressed sales,” O’Farrell said. As an appraiser, “you can’t ignore them. You might have one subdivision where, 30 days ago, there were five foreclosures. That’s a hard factor to ignore.”


Luck of the (blind) draw

What’s been particularly annoying, Bowen and O’Farrell said, has been some of the changes brought into the appraisal process after lending abuses were discovered throughout the industry during the recession.

Reforms intended to protect the process from insider influence sometimes have resulted in local appraisals that have been far off the mark, they said.

“Back in the late ’90s, if you ordered an appraisal from me, the bank used to accept it,” Bowen said. “Now, they’re certain you influenced me, so my appraisal (in those circumstances) wouldn’t be credible.”

In the new system, each lender has a list of appraisers it accepts, O’Farrell said. Appraisers are hired to value properties in a “blind draw,” where property assignments are made in a sort of rotation, without the lender knowing which appraiser has been hired to evaluate which property, he said.

As a result, they said, the appraisers sometimes are out-of-towners who, they think, must be relying on online information, rather than coming here to see for themselves what’s happening.

Citing various instances, O’Farrell said, the results “cause a lot of frustration” and a loss of value that those involved “have to eat.”

Then, he said, he hears the complaints from Realtors because he does appraisals, too.

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