This post was contributed by a community member. The views expressed here are the author's own.

Health & Fitness

Appraisers Are No Longer Able to Hold Back Home Price Appreciation - It's Heading Up Fast

A recent phenomenon in this tight real estate market is taking the lid off home prices in Sonoma County. Buyers agree to make up in cash any shortfall between the purchase price and appraisal.

A recent phenomenon in this tight real estate market is taking the lid off home prices in Sonoma County.  Multiple counter offers sent out to prospective buyers include an agreement that buyers will make up in cash any shortfall between the agreed purchase price and the appraisal.  Buyers are agreeing to this condition so they can be the selected offer and get a chance to buy the home they want.  This is a bit scary.  Here is an example.

I made two offers for my Buyers on homes in Rohnert Park.  They both ended almost exactly the same way for us.  They were priced around $400,000.  I am using round numbers here.  On the first one, we offered $15,000 more than asking.  We received a counter offer asking for another $20,000... that is a total of $35,000 over asking price!!  They sent counter offers to four of the original offers.  Here is the scary part... In their counter offer to all of us they included the condition that the Buyer will not be able to change the price if it does not appraise.  In other words, the buyer will have to make up the difference in cash.  We accepted the counter offer, but removed that provision.  We were declined.  Whoever is buying the property is accepting that provision.  The appraisal will most likely be about where we made our offer, and the buyer will have to bring in an additional $20,000 cash above the appraisal to close escrow.

The next offer we made went almost exactly the same way.  We offered $15,000 over the asking price.  We thought the asking price was about where it should appraise.  The counter offer that was made to four of the original offers was for another $20,000... that is a total of $35,000 over the asking price!!  This counter offer to us also included the condition that the buyer will not be able to change the asking price if it does not appraise.  The buyer would have to make up the difference in cash.  This time, the price had been pushed up to a place where it did not make any sense to us...  $460,000!!! We declined to respond, but someone else DID agree to purchase at $460,000 and pay any amount over the appraisal.  Again, the buyer will have to bring in an additional $20,000 cash above the appraisal to close escrow.

Find out what's happening in Petalumawith free, real-time updates from Patch.

What does this all mean?  It means that when these escrows close.. in less than  30 days from March 1st, these new sales WILL be used by appraisers to set the new floor for appraised values.  To summarize, that means that IN ONE MONTH, there is about 10% appreciation for Rohnert Park homes priced around $400,000!!!

Now, this could not happen if Buyers did not agree to abandon the requirement that the property appraise.  In the past, buyers could cling to the appraised value unless another appraisal was done to raise it.  iF the property appraised for less than the agreed purchase price, the Seller would have to take the appraised value because the buyer would not pay more that appraisal if they were paying cash, and could not pay more if they needed a loan.  NOW, it seems that buyers ARE willing to pay whatever extra it takes above the appraisal, EVEN IF THEY NEED A LOAN. 

Find out what's happening in Petalumawith free, real-time updates from Patch.

This phenomenon seems to be spreading to other areas, including Petaluma, Penngrove, Sonoma, Sebastopol, Santa Rosa, Novato, and Windsor, and all over Sonoma and Marin counties where multiple offers are being received on homes for sale.  Appraisers are not able to hold the prices down.

In the past, appraisals were limiting the rate of price increases.  This lid seems to have been blown off now. This is a whole new market dynamic.

In fact, up until about the middle of 2012, the appraisers were responsible for driving prices DOWN.  Appraisers had to follow rules that they could not appraise higher than the last sale unless the market was already moving up.  Appraisers are now threatened with personal liability and losing their license if they over-appraise and a foreclosure occurs.  If they are going to make a mistake, or they do not have enough prior sales to use as a baseline, they make their mistake by appraising low.  Prices kept dribbling down and down, even when there were multiple offers over the asking price, until FINALLY, CASH buyers agreed to buy anyway, regardless of appraisal. They could outbid buyers who were cash short and needed a loan.  This began at the low end of the market when cash buyers realized they could buy a home for cash and rent it out for a 10% return instead of the 2% or less they were getting in bonds, banks and money market funds.  They also got tax benefits to shelter their income.  Now, cash is being used to supplement loans in order to buy in higher price ranges.

We could have been out of the housing recession three years ago if the rules and working conditions for appraisers had not been changed in 2010.  Basically, they were being blamed and abused for the banking crisis.  Appraisers led us out of the prior housing recessions quickly, as professionals who reflected the current market conditions.  In those prior recoveries, if a buyer and seller agreed to a selling price, and especially if there were multiple offers, that price was justifiable for an appraiser.  Appraisers were able to discuss the conditions of the sale with the realtors and the buyer and seller.  This gave them a complete picture of the purchase, and allowed them to make an informed estimate of the market value at that instant.  Appraisers did use prior closed sales as guidelines for value, but they were able to take into account all these other factors. 

However, Congress in 2010 determined that they were going to limit the ability of appraisers to allow the market to move prices upward rapidly. There had been some examples of appraisers and banks conspiring to approve higher loan amounts so the banks could make more fees, but it was the banks coercing the appraisers.   Congress acted, wrongly putting the blame on appraisers instead of where it belongs... ON THE BANKS.  The Appraisers are being abused.

Now, Appraisers have to work for middlemen instead of bankers.  Congress created an entire industry of unlicensed middlemen businesses for their friends. It has become so profitable that BANKS are now the dominant owners of these businesses.  They are taking another bite out of our hide.  We all have suffered, and appraisers have suffered the most.

The (now bank-owned) middlemen charge more for each appraisal than appraisers ever did, and appraisers are being made to work for about half what they used to make because they can only work for the middlemen.  The Middlemen charge $650, and pay appraisers $250.  Appraisers used to make $450 when they were independent professionals, and that is what they charged the banks, who passed it on to the borrower.  Now, the middlemen charge the banks $650, and the banks pass on the charge to the borrower who is getting the loan.  Borrowers now pay $200 more, and appraisers get paid $200 less, and the middlemen, who never existed before, keep that $400 difference per appraisal.  THERE OUGHT TO BE A LAW protecting consumers and appraisers from THE ABUSIVE CHARGES BY THE MIDDLEMEN, who are not licensed, do not contribute anything professional, often assign unqualified appraisers, and just take, take, take.  Now, the banks are getting the take.

Before Congress acted to punish appraisers as the whipping boys for the misbehavior of banks, appraisers were treated as the independent professionals they were. Not anymore. Appraisers don't get any respect.  Appraisers have to do much more work now on an appraisal, have to turn it around in two days, and they are treated like slaves, not professionals.  AND, yet they get paid about half of what they used to make.  Appraisers have to pay all their own expenses, including gas, travel, meals, licensing, and Errors and Omissions Insurance, etc.  Meanwhile, the middlemen they have to work for do NOTHING BUT TAKE ORDERS FOR APPRAISALS AND PASS THEM OUT TO APPRAISERS, while making more money than the appraisers on each appraisal.  This is a BAD idea.  Appraisers sometimes just get disgusted and make a low appraisal to protect themselves, and because they can barely make a living, and are not allowed to use all the information they really need to do a professional appraisal. Many excellent professional appraisers have just quit the business altogether.  This is a great loss of expertise.

Well, now the market has found a way around the bottleneck in price appreciation caused by putting strict guidelines on how appraisers do their job.   the 2010 appraisers guidelines say they are not allowed to follow the market by looking at each transaction as a free market negotiation.  Appraisers can only look only back to establish value.  They cannot get help in understanding each transaction from the Real Estate agents or Buyers and Sellers.  They are required to operate in isolation.  In this rapidly upward moving market with multiple competing offers, looking back means looking down in value. This put a limit on how fast and how far prices could move up, even keeping them from moving up at all. But now, they are being bypassed to set ever higher sale prices.  These higher prices then become the very comparable sales appraisers use to determine the value for the next sales.  After being bypassed, the appraisers have to follow.

Now that appraisers are being bypassed, it seems that extremely rapid price increases are upon us, and this will translate into inflation, lower affordability, and ultimately, higher interest rates.  As long as there is more demand for housing than supply, multiple offers will occur.  As long as buyers have extra cash on hand so they can outbid other buyers, and bypass appraisals, this will continue.  I see no end in sight until prices get unreasonable again or interest rates rise.  Since interest rates have to stay down for the U.S. government to be able to pay the interest on the National Debt, it seems that prices will continue to rise until they are unreasonable again.  That sounds like "Bubble", but it will not burst like the last time.  This time, it will be a levelling off, because banks will not make loans that don't make sense again. 

This means we are in for rapid appreciation in home prices, and they will stay up there when they get unreasonable until interest rates rise significantly, making it even harder to afford.  Get in NOW, or get left out.

We’ve removed the ability to reply as we work to make improvements. Learn more here

The views expressed in this post are the author's own. Want to post on Patch?