By Mike Bodeen · 20 July 2020
In 2005, mortgage lenders churned out millions of mortgages with many of them throwing out historical lending best practices. Why? Because they could, and there was very little oversight. In this perfect storm of hideous and illegal financial behavior, America, and much of the world suffered through a financial pandemic. Many of the banks that used these shoddy practices then went out of business. A very fascinating but complex movie about all that is called, “The Big Short.” Worth the watch but put down the social media devices and focus on the movie.
We are in a most unique and historical real estate market in Arizona. Though we have a world pandemic, and are locked up in our homes, we have a local real estate market that’s been unstoppable, decreasing in inventory and increasing in value.
Due to the markup and blowup of 2005-2008, new, (or old) appraisal practices, and lender standards returned which did help calm the market. Today, we have record low mortgage rates which, combined with buyer migratory practices, have created a way low home inventory. This sets the stage for one of the most important occupations currently in our country – the real estate appraiser.
So what’s the problem? The problem is, especially if you’re a buyer, ballooning real estate values further deteriorating affordability, despite the record low mortgage rates.
Appraisers are now back in a real tough spot. Appraisers are required to provide comparable sales (comps) for the lender, representing the buyer. Because of the fast market appreciation, there are few comps to support the new higher purchase prices. If a home does not appraise for the purchase price, the buyer does not get the loan requested and so, often the deal falls through.
What can be done at this point? The first thing is that the buyer and seller usually negotiate the price down. If they don’t agree, the deal dies. The seller can also request a new appraisal, but that’s often a non-starter, as few real appraisal professionals will bring in a much higher price than the first appraiser did.
This brings up the advantage of a cash buyer which is why some wise sellers may opt to go for a lower sales price compared to another offer if it’s cash. With cash deals, there’s usually no appraisal unless the buyer requests it.
Another buyer strategy is to waive the appraisal contingency clause in the purchase contract, so that if an appraisal is too low, the buyer still agrees to buy the home or suffer the loss of their earnest deposit if they don’t close the deal.
If appraisers were required to use best practices in 2005, perhaps much of our economic turmoil would not have happened. However, that’s probably just wishful musings. Lenders would have figured out how to make it work. After all, money is their business, and they’re darn good at it.
Good appraisers are sometimes referred to as the “breaks” of a fast upwardly moving market. Perhaps our market can benefit by some breaks being applied.