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How appraisers value homes in a hot housing market

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Robin Sheridan, a real-estate broker with Compass Washington, recently listed a three-bedroom home in Seattle for $795,000. The 76-year-old brick home had what Sheridan considered a “funky layout,” with two rooms added to the back that didn’t quite integrate into the flow of the home. Still, they functioned well as office spaces.

Sheridan received 29 offers on the property, which went pending within five days – and sold for $1.013 million, or 27.4% over the list price.

As anyone involved in the residential real-estate market knows, bidding wars – and contract prices exceeding the list price – are the norm today in many markets around the nation.

Sheridan’s listing appraised at the contract price, and the deal went through without a hitch. But how do appraisers value a home in a market where prices are escalating rapidly – and where nearly two-thirds (64%) of listed homes faced bidding wars in March, according to Redfin, due to low mortgage rates and a severe shortage of homes for sale?

“The challenge is that the sales data you’re looking at is dated,” said Shawn Telford, chief appraiser at CoreLogic. “While the comparable sale might have closed three months prior to the appraisal, it went under contract before that, and market conditions five months ago were different than they are today. That’s where appraisers put on their thinking caps and dig in and do their research on how they might adjust the comparable sale they’ve selected to account for current market conditions.”

Indeed, time adjustments are a valuable tool that appraisers use to reflect changing prices in the local housing market. “They might look at the last three to six months of sales activity – or longer – in a defined market and try to extrapolate what the trend is,” Telford said. “If home prices increased month over month by 1%, they can use that pattern to support an upward adjustment to the comparable to accurately reflect what the subject property might be doing.”

Even in the best of times, there is an inherent lag in the system because often, counties are backlogged and slow to record deeds. So, appraisers often use MLS data, rather than deed records, as the data tends to be fresher.

According to GSE guidelines, Fannie Mae and Freddie Mac require a minimum of three comparable sales as part of the sales comparison approach. Appraisers may submit more than three comparable sales, including pending sales or current listings, to determine the housing market trends in the neighborhood and to justify their opinion of market value – and they must include an explanation of their conclusions in the appraisal report.

“It’s more important than ever in this market to utilize your writing skills,” said Warren B. Boizot III, president of BLG Appraisal Group in Denver. “Remember that the end reader of your appraisal report – the underwriter – is not in your market, so you have to explain what’s going on. It’s crucial because if I just throw three comps in there and don’t tell them what’s going on in a crazy housing market, the appraisal is not going to fly.”

Boizot routinely interviews listing agents to get more information surrounding the sale, such as how many showings there were and how many offers came in. “If there were five other people willing to pay the contract price, then that goes to show it’s not just a pie-in-the-sky number,” he said. “That’s all good information that I’ll include in the report.”

One recent example: Boizot appraised a 2,400-square-foot home on the outskirts of downtown Denver. About 65 years old, the home was listed for $370,000. It spent four days on the market, had 202 showings and received 56 offers, 55 of which were at or above list price. The home ultimately sold for $477,000, or $107,000 over the asking price. Although the appraisal came in at just $431,000 – well-supported by the data, Boizot said – the deal closed.

“Realtors believe it is the job of the appraiser to get to that crazy number, but it’s not,” he said. “I’m there to give a non-biased, third-party opinion on what I think the home is worth based on my expertise and knowledge. Sometimes that crazy number is reachable, but sometimes it’s not there and it’s not my job as an appraiser to get there.”

Other tools used by appraisers in housing markets where closed sales may not be the most accurate indicator of value due to rapidly-rising prices include pending sales and listings. Pending sales are not public knowledge, and brokers often will not release a sales price until the deal closes. But they might indicate if the property sold for above the listing price.

This is where being a local appraiser matters. “If you’re immersed in a local market – you’re not driving all over the state – then you pick up data through your own experience,” said Jonathan Miller, president and CEO of Miller Samuel, an appraisal firm in New York City. “It’s not just getting the price. In this current frenzy, you need to know the story behind the sale.”

For example, if a property came on the housing market and sold within 48 hours with five backup offers, it’s a good assumption that it sold for at least the list price, he said.

Miller echoed Boizot’s sentiments about the role of the appraiser, particularly in a frothy housing market.

“The appraisal gap as a catchphrase is a bit dangerous,” he said. “The default assumption is that the appraiser is wrong, as opposed to being a neutral market benchmark on what’s going on. When we get into these frenzied periods, appraisers are the only party who don’t have skin in the game, but they become the focus of attack. It shouldn’t be on them as much as it is.”

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