June 12th, 2009 9:52 AM by Joan Rusco
A client finds the home they want, the Realtor writes the offer, gets an acceptance and off we go to the races. But whoa! There’s a problem. We find that the property won’t appraise for the accepted sales price. The bank won’t lend the amount needed to complete this purchase. What?!! How did this happen? We have a willing seller and a willing buyer and yet the bank is saying ‘No Deal’? We have run into this problem again and again in our Minnesota Real Estate market. Let’s examine what’s going on. Who’s to blame? Is it the home seller? Is it the Realtor? Is it a naïve buyer? Is it a naïve agent? The answer is “yes”, it can be all of the above.
Recently I had a first time Minneapolis home buyer look at a nice 2 bedroom/1 bath Craftsman style house. It was perfect: natural woodwork, updated kitchen and bathroom. The asking price was in the mid $200k range. Before taking the next step in writing the offer the Realtor representing this client checked the mls for recent sales in the neighborhood. He did not like what he found. He asked that I check with my trusted home appraiser. Before visiting the property and incurring a cost to my client the appraiser did a quick desktop search for recent sales. The problem was, said this FHA/VA approved appraiser, there was not a comparable sale over $215k. The buyer’s agent phoned the listing agent and told her my client was interested in the home but even if she were to offer their full asking price the deal would not go through because it wouldn’t appraise at their price. This veteran agent was flabbergasted. She insisted they were very careful about pricing. She indicated they did a thorough analysis of the property and reached what they were sure was a fair market value. She also said for proof she would send the comparable sales used for the pricing. Now, I know that everyone can make mistakes, even the appraiser I had come to trust and use many times before. Soon I learned this was not his mistake. Two days later I received the comparable sales the Realtor had used to price the property. The most recent sale of the 6 properties she had used was 14 months old. The oldest of the set was almost 2 years old.
In another case I received a purchase agreement on a small house in a northern suburb of Minneapolis. This first time buyer was using an FHA loan to make the purchase. I soon received a call from my appraiser saying the house was not worth the price. Again, the buyer’s Realtor in this case (a successful veteran with 20 years in the market) checked with the listing agent. It’s the same story: the agent had priced the property using comparable sales dating back a year. The buyer’s agent was convinced the price was good and he pleaded the case saying the comps were only a year old.
In yet another case where an agent had over-priced the listing we were told in a rather impolite way that “…the property sold just two years ago for more than the current asking price and they got a loan”. Are you kidding? In this market where many neighborhoods are classified as “declining” a Realtor would actually think that a sales price dating back two years is relevant?! Sorry, these so-called comparable sales might as well have taken place on the moon. There are exceptions (aren’t there always) but they are very, very few and far between.
These are not isolated cases. Let me share a simple truth: when pricing (or making an offer on) a property, you must look at the most recent sales data in the neighborhood! Lenders will not cherry-pick to get the highest value as may be the case in these examples. Guidelines set forth by lenders are quite clear on this matter as stated in Fannie Mae’s “Guidance for Lenders and Appraisers”, April 2009:
The appraiser should use comparable sales that have been settled or closed within the past 12 months. However, the appraiser may use older comparable sales if he or she believes that they are appropriate, and selects comparable sales that are the best indicators of value for the subject property. The appraiser must comment on the reasons for using any comparable sales that are more than six months old.
Notice the last three words in the Fannie Mae guidelines: six months old. This means if the Appraiser includes sales data over six months old they have to make the case. And the case had better be solid. Adding to the problem is that the most recent sales may not even be what we would consider “fair market” transactions. They may be foreclosures or short sales. In these cases the lenders want to bail and recoup whatever they can. They are not willing sellers but rather are forced to get properties off their books. These sales can distort market values. But if that’s all there is in a neighborhood then willing home owners may be forced to live with those depressed price.
Realtors and their clients should be very diligent about an offer or sales price. Before spending one dime of a client’s money my appraiser is willing to take a quick look at current comps. In our current market this is more important than ever. What happened one year ago in a neighborhood is more than likely an irrelevant event.