How the Appraisal Affects Your Ann Arbor Home Sale

The good news is the Ann Arbor Real Estate market is starting to show signs of recovery.  Residential inventory is down 22% from 2008 and condominium inventory is down 29% from 2008. Interest rates are at historical low rates, and prices seem to have stopped the downward slide that we’ve experienced for the past several years. We are actually seeing multiple and over list price offers on Washtenaw County homes in certain niche markets.

Then May 1st came around – the date that the Home Valuation Code of Conduct was instituted. This Code of Conduct applies to all mortgages being purchased by Fannie Mae and Freddie Mac and was intended to protect appraisers from pressure by lenders to hit predetermined values.

I’m sure that the intentions were all good, however, like most reactionary legislation, it is an over reaction to a problem that was exploited by a minority of people in the industry. Appraisals are now being ordered through management companies which results in many out of area appraisers working in Ann Arbor neighborhoods they have never heard of before.  Years of relationships with local established, veteran appraisers are being sacrificed.

What is actually happening is that the Ann Arbor housing market is being artificially dampened by incorrect appraisals. We have home buyers who are willing to pay market value for a home, and even pay over list price in an attempt to purchase a home in a market where the inventory is shrinking. The lack of supply in certain niche markets is causing prices to go up – however, the appraisal prevents that from occurring.  I understand that there have been many abuses of the system in the past, however, what is occurring now is the opposite.

Just in the past several weeks, I’ve had 5 appraisals come in WAY below market value and quite frankly, I’ve been shocked by some of the adjustments that were used and by the properties that the appraisers were using.  What I found most interesting is that as Realtors, we have certain industry standards for adjustments that we’ve used for years in an effort to price a home correctly.  Suddenly, we have appraisers who are using adjustments that make absolutely no sense.   Adjustments such as $1,000 for a garage, using $25/SF, when the norm is more like $40-50/SF, $1,500 for a double tiered deck, comparing ranches with finished basements to ranches on slabs, and the list goes on and on. Following are some of my recent experiences:

• Sold a home for the mid $400′000’s in a one of the most desirable school districts in Ann Arbor.  I had many comparable sold properties to support the price.  The appraisal came in at $395,000 with almost all of the comps being located in a less desirable school district and many of the comparables were from last summer. After going back and forth with the appraiser for a couple of days, the appraisal came up to $425,00. The appraiser did agree to use a neighborhood that I felt was very comparable, however, he used all sales from last summer, when the 3 most recent sales occurred in the past 90 days, and more than supported the value of $450,000.  Because of the delay in getting appraisals completed, we were dealing with this a week before closing, so we didn’t have time to go to another bank. The seller didn’t want to lose the home he was purchasing out of state, so he closed and took a $25,000 hit. The market now has a comparable at $425,000 when we had a buyer willing to pay $450,000.

• Sold a home for over $300,000 with 2 back up offers.   Appraisal came in at $265,000.  After going back and forth with the appraiser, the appraisal came up to $290,000.  With 2 other buyers in the background willing to purchase the home, the purchaser came up with the cash to close at the sale price. Again, there were plenty of comparables to support the value and the current inventory was all priced considerably higher.  But most important of all,  the market was telling us that the sales price was correct because there were 2 other buyers that wanted the home. In this situation, the buyer had to deplete his cash in order to buy a home that should have easily have appraised at sale price.

• Sold a ranch with a spectacularly finished basement on the west side of Ann Arbor in the mid 220’s.  The appraisal came in at $184,000.    In spite of comparables in the immediate neighborhood, the out of town appraiser used comps from a totally different neighborhood, and used a ranch without a basement.  We changed banks and the new appraisal came in over the sales price – which is where it belonged.     

The list goes on and on.  The bottom line is this;  in most instances the home seller has to come down in price to make the sale happen and this continues the downward spiral on prices.  Prices can not begin coming up if we have appraisals that won’t support what the market is willing to bear. The most frustrating part is that in every situation, there were comparables to support the price.

So despite all the talk of the Ann Arbor real estate market beginning to recover, the increase in values will be artifically dampened by the low appraisals that we are seeing.  We have to be aware that regardless of what a buyer (the market) is willing to pay for a home, the final say goes to the appraiser.  As an Ann Arbor home seller, you need to understand that the price that you’ve negotiated with the buyer doesn’t necessarily determine the price that you will close at. Until the guidelines are changed in regards to appraisals, your closed price could be very different from the price that the buyer and seller initially agreed to.

Wondering what’s going on with home prices in your neighborhood? Have neighborhood specific Market Updates emailed right to you for free! As always, if you want to discuss your home’s value in more detail, give me a call at 734-761-3060.

Until next time-

Martin