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bj · Guest

I am an appraiser struggling to find comps. Homes in my area are selling for 10-30,000 more than they were 3-6 months ago. The problem I am running into is a house that currently is being sold for ex: $155,000 has a comp sitting right next door to it (exact condition and floor plan) that sold 2 months ago for $136,000. This is becoming the norm in several areas. How do you support the estimated value of $155,000 that a reasonable purchaser is willing to pay for a property when the most recent comparables sold for so much less? The supply and demand is not in balance. Help!

nemmar · Site Admin

There can be a difference between the Market Value and Speculation Value. For example, in the 1980’s real estate prices were escalating so fast it was ridiculous, like the market has been doing in this current real estate boom market. If you remember that at the end of the 1980’s and early 1990’s the real estate bubble burst and housing prices plummeted and bank foreclosures skyrocketed. That was due to the market having a high percentage of speculation buying and selling of homes by investors as opposed to home buyers looking to live in the house. Also, the Saving and Loan regulations were made less stringent so the S&L’s went nuts loaning money on over-priced and over-appraised real estate nationwide – which ended up costing the taxpayers billions in the S&L bailout when that market bubble burst. I personally did an incredible number of foreclosure appraisals for banks and mortgage lenders that had to repossess homes from delinquent borrowers. I saw far too many foreclosed properties that had been over-priced and over-appraised that the mortgage loans should never have been granted in the first place. This is what led to the Federal rules to license all appraisers to prevent this from happening. However, it seems that once again, appraisers are being pressured by mortgage lenders to “hit the number” when estimating market value in their written appraisal reports - even if the sales price is too high. I talk about this in the new edition of my appraisal book.

With that said, here is what I think you need to consider for your current appraisal problem:
You mentioned that “the supply and demand is not in balance”. That’s very important because YOU are the professional – not the bank, mortgage lender, Realtor, seller or buyer. If you’re professional judgment is telling you that the supply and demand are not in balance then mention that in your appraisal report. For example, you could use the sales comps from 2-6 months ago if they are the most recent comps that are ARMS LENGTH transactions. If you have any indication that one or some of these comps are not arms length transactions or that a buyer/seller was abnormally motivated or there was unconventional financing, then don’t use that/those comps. Spend the time to get other comps and if you have to go back further in time, then make time adjustments. If you feel that the sales comparables you have within 2-6 months from the “As Of” date of your appraisal are arms length transactions, then use them and make time adjustments (market to market adjustments) in your appraisal report. Attach an addendum explaining your reasons about the local real estate market increasing very rapidly due to the supply and demand being out of balance. The time adjustments are necessary for the different market conditions at the time the sales comps closed, even though it was only a few months ago. These time adjustments are made to reflect the market conditions at the time the comparables sold, as opposed to the "as of" date for the appraisal of the subject property. You could use a statement in your addendum like:
“Market Conditions. Account for changes that have occurred or are occurring from the date of sale of the comparable transaction to the date of appraisal, including appreciation, new development, availability of financing, loan terms, supply and demand.” And then elaborate on that for the client in your written report.

Remember, that YOU are the appraiser and YOU have to use your own judgment and experience to estimate the market value. DO NOT let any lenders or clients pressure you to “hit the number” and come in at a higher price on your written report if you feel uncomfortable with that market value. There are appraisers who lose clients because they refuse to over-inflate their market value estimates to satisfy the mortgage lender or client. However, it’s better to lose a client then to lose your license years later when this housing bubble deflates and the foreclosures start coming in. Here's an article on this topic in my online RE Library http://www.nemmar.com/real-estate-New-Federal-Mortgage-Lenders.html

The market might not plummet like it did in the late 1980’s because there is less speculation now then there was back then. But this real estate market certainly has to slow down and stabilize soon because the prices are just getting out of whack with people’s incomes. Let me know if this helps.