Appraisal Conundrum
By Jim Palmer Jr.

  In recent days, appraisers are getting a bad rap simply because we are seeing a plethora of low appraisals, and that makes them seem like the bad guy. That problem predictably occurs in a market when prices are rising rapidly. When this happens it can cause angst for buyers and sometimes for sellers. I say sometimes for sellers because in the current hot market sellers seem to be indifferent about losing buyers who can’t perform because of a low appraisal or who are not willing to make up the difference. The sellers quickly move on to someone who can perform without getting a bank loan or who have more available cash on hand.

In a recent example on a land transaction, the lender initiated the loan application and an appraiser was assigned. The appraiser searched the data base for appropriate comparable sold properties but was unable to substantiate a value that would confirm that the agreed upon sales price was a good risk for the lender. When the seller was contacted and the low appraisal was revealed, the seller callously and truthfully informed the buyer that they were not willing to negotiate a lower sales price because they had a back up offer for cash that was even more than full price. Luckily the anxious buyer was in a position to pay the difference between the appraisers valuation and the actual agreed upon selling price. They rushed to communicate that to the seller. The irony of this case is that when this deal closes in a few days, the full-price-closed-amount will then serve as a legit comparable for appraisers, when that sales data did not exist just a few days prior.

Had the oblivious appraiser known, they could have stalled for a few more days and there would have been several more closed sales in the same subdivision that would have dramatically changed their opinion of value and substantiated the sales price to the lender. What does that say about the validity of appraisals? One thing it does prove is that appraisers do not determine the value of real estate! Only a determined buyer can do that. Appraisers only work for the lender to determine whether the loan amount can be offset by the collateral without posing too much risk to the lender.

I expect this appraisal conundrum will continue for some months ahead, or as long as inventories fall far short of the demand, causing prices to continue to soar.