You know all those people who keep telling you that the banks aren’t lending? Those people who want you to believe that it’s impossible to get a loan these days for a primary home, to say nothing of a vacation home? Those people aren’t exactly right, but unfortunately, they aren’t exactly wrong either. Second home purchases have long required down payments of roughly 20%. These minimums did indeed change during the era of easy credit, but by and large the requirements have remained stable. The Lake Geneva market isn’t heavily leveraged as it is, and the cash position that many buyers buy in has largely saved us from any significant level of foreclosure trouble. Loans are readily available, but there’s a new enemy of the housing market emerging, and the enemy is a long time friend of the process. The appraisal. We’ll leave the appraisers themselves out of this for now, but the instrument of their labors, the appraisal itself, it creating quite a stir in the housing market of 2009.
I’ll tell you what an appraisal ought to be. It ought to be a report that validates the value of a property. A buyer wants to buy a home for $500k. He loves his $500k home, and he’s happy to pay $500k. His $500k home was at one point listed for $600k, so he feels pretty secure in his purchase. This buyer just set the value of the home at $500k, and as we’ve learned in past posts, if he wants to pay $500k for it, it’s just plain old worth $500k. The appraiser comes in and should research the market and provide comparable sold and active properties to prove the value is roughly $500k. Bank likes the value, buyer likes the value, appraisal validated the value. That was the way it used to work. Today, it works more like this…. Buyer wants to pay $500k for a home. Appraiser comes in and says the home is only worth $450k. Buyer can’t get his loan because the bank doesn’t want to lend based on a $500k value when the big bad appraiser says it’s only worth $450k. Deal goes bad. House sits on the market longer, the price drops, and the price of the surrounding homes drop right along with it. Appraisals are the new problem, and I don’t like it one bit.
Some of the issues relating to appraisals are in the locating and delivery of timely comparable sales. If you’re on block 12 in Schaumburg, the bank probably wants comps on block 12 in Schaumburg. They also want those comps to be within 60 days ideally, possibly 90 days. That is of course, ideal. The problem with a slow market is the availability of recent comps. This is a problem in larger municipalities, but it’s a more pronounced issue in smaller volume markets like Lake Geneva. If you’re looking for a comp for a sale in Fontana’s Buena Vista, you’ll find exactly two sold property comps in the MLS over the past two years. The appraiser is going to have to either use old comps, or move further away geographically to find comparable sales. That method works, but newly stingified bank underwriters aren’t buying it, so the deals are stalling out. The personal nature of the real estate business is gone, as banks seek to distance themselves from appraisals, which leaves them little room to negotiate the outcomes of those appraisals and even less room to save a deal once an appraisal has derailed the sale.
The issue has gone so far as to dictate intervention from the National Association of Realtors. Today, Charles McMillan, president of the NAR, is in Washington DC meeting with the Director of the Federal Housing Finance Agency (what, no czar for this? Just a stinking Director position?), to discuss ways to get the appraisers and banks on the same page with the real world. If a buyer is buying a home and he’s paying $500k for it, it’s worth $500k. Appraising homes isn’t difficult folks, and only in issues of extreme confusion would a buyer be paying a price that far exceeds true market value.
If you’re a buyer, let’s keep looking for homes, and let’s keep borrowing money to buy them. The issues that arise with most appraisals can usually be smoothed out with some additional comps, and are mostly causing delays in closings, not cancellations of contracts. To my appraiser friends, please do your best to follow the market and adjust to the prices, but don’t dictate to the parties the value of a home when the value has already been set by the BFF of capitalists everywhere, the free market.