APPRAISALS - Protecting Yourself When Buying and Selling

There are lots of reasons to be optimistic in regards to real estate in North Georgia.   A  recent National Association of Realtors (NAR) article reported sales of vacation homes and investment properties remained elevated for a second consecutive year.  Many of our North Georgia homes and cabins, from Lake Lanier to Lake Chatuge, are or could be vacation homes for the Atlanta market.  

We are seeing listing price to sales price ratios narrow, with a sales price more than list price in some instances.  On a recent sale at 3804 Hilldale Road in Oakwood GA, the contract came together at $128,400, more than the list price of $124,900.  Many wonder how or why the sales price ends up more then list price.  The seller agreed to pay $6500 in closing costs.  Therefore, even though we were selling above list price, the seller was still offering $3000 as a concession to listing price.  That is, until the appraisal came in.  The appraisal came in at $119,000.  I disputed the appraisal, offering a comparable sale a little farther away than the $99,000 foreclosure sale the appraiser was using in the same neighborhood.  But it didn't work.  Unfortunately, I am rarely successful in disputing an appraisal.   Just a few days ago, a contract in which I was representing buyers terminated.  In this instance, the list price was $330,000; the buyers agreed to pay $328,000 with no seller concessions.  Are you seeing why I'm feeling optimistic?  Then, the appraisal comes in at $300,000.  The sellers would not agree to sell for that, and the buyers and I are back to square one, looking for a house.  I wonder if the fact that the house was on the market off and on since last June at that list price of $330,000, led to the appraiser thinking the value was not there. I used to say "It's worth what a buyer will pay" but I have had to rephrase that.  It's worth only what the appraisal says it's worth (unless the buyer is paying cash and not relying on an appraisal to establish value). 

My sellers and I got really excited because we got a full price offer on the Lake Lanier listing depicted below the week I listed it.  We had a $559,000 contract on a $559,000 list price.  Then it appraised at $535,000; I disputed the value unsuccessfully.  Imagine my disappointment and the sellers' disappointment.  We did end up selling it at the appraised value of $535,000.  There were over $150,000 in improvements between the back door and Lake Lanier but the appraiser refused to give any value whatsoever to the gunite pool and the improvements behind the house.

A frustrating aspect of today's market is having a ready, willing, and able buyer eager to pay the price, but the appraisal won't let it happen.  These are not buyers looking for 100% financing either, as was the case far too often a few years ago.   I should note that prior to 2006, I had only had a handful of appraisal issues in all of my years of selling real estate.  The real estate crisis did not happen simply as a result of lenders being able to communicate with appraisers as some allege.  Our recovery and market appreciation is being hampered by these appraisals, as this recent article from NAR explains in further detail.

HOW DO I PROTECT MYSELF WHEN BUYING?  Make sure  a Financing Contingency and/or Appraisal Contingency is an Exhibit to your offer.  If you are working with a Georgia Realtor using GAR forms, the Financing Contingency form incorporates an Appraisal Contingency into the Financing Contingency Exhibit so that you do not have to attach a separate exhibit for the Appraisal Contingency.   Allow at least 21 days for the Appraisal Contingency and then give the Seller two or three days to get back to you in the event of a low appraisal (after you have submitted an Amendment to Reduce Sales Price).

Inventory is low due to smaller numbers of foreclosures and sellers who cannot sell due to mortgage balances higher than their property will sell for.  The basic rules of supply and demand would dictate that prices will go up as a result of decreased inventory.  However, it won't be as quick as I'd like and as quick as it should be, due to appraisals like these that are holding values back and appraisers who cannot or will not accept that the market is no longer declining, but appreciating. 

SHOULD I GET AN APPRAISAL PRIOR TO SELLING?  To prepare for an appraisal, your Realtor can gather recent comparable sales within the previous six months.  I am told by lenders I work with that Fannie Mae wants to see only sales that are less than six months old.  I would say NO for the following reasons:

• The textbook definition of appraisal is 'a professional opinion of value.'  Every appraiser is going to have a different value, especially when it comes to valuing waterfront properties.  Many appraisers are not well versed in valuing lakefront properties and understanding which factors have more weight in determining value (see my most recent blog entry).  I have listed properties in the past at higher values than I recommended simply due to the fact that a seller had a recent appraisal quantifying the value, only to find out months later that the appraisal was way off as to what a buyer in the real market would pay.  Typically, the longer a property is on the market, the larger the spread between list and sales price.  In one instance, an appraiser valued a Lake Lanier property at $670,000.  I listed it at $599,000; it sold 10 months later at $400,000.  I have lost out on many listing opportunities because I could not tell a seller what he or she wanted to hear as to value.  Rather than giving an exact number, I typically recommend a pricing range.
• There's no added value.  The appraisal will cost approximately $500.  The buyers don't care what it appraised for and neither will their lender.  An appraisal is order by the lender, for the lender. 
• Market is changing.  We are seeing higher average sales prices and lower inventories.  Also, there are fewer foreclosures and the stock market is producing good numbers.  All this means that prices should move upward.  Most analysts expect that we will see 3.5 to 4% annual appreciation for the next several years, ending the decline we have seen since 2006.
• Your REALTOR can probably do just as good a job or better.  An agent has access and reviews the same data (MLS active listings and solds, tax records, etc) and may have a better feel for current market conditions than the typical appraiser. Most likely, an agent has actually been inside the comparable sales.  An agent knows typically what makes a property more marketable than others and can recommend a sales price based upon current competition.

If you're considering selling, call me for a no obligation market analysis.  I'll take a good look at your property and then review recent sales, current pending listings (those under contract scheduled to close), and current competition.  Then you can decide if it works for you to sell in today's market.