Appraisals and ValuationsHousing MarketReal Estate

Working with buyers in the nation’s hottest housing market

In Austin, lenders, appraisers and real estate agents are battling a surge in demand

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Austin, Texas might be the hottest housing market in the country. The Lone Star State’s friendly tax policies combined with the city’s huge tech scene and its cool factor have made it a destination for Silicon Valley types for several years.

In addition to the same demographic factors driving growth elsewhere — all those millennials buying homes — the number of companies relocating there is a huge draw. Austin has ranked as the No. 1 city in population growth for the last eight years and it was the hottest job market in 2019 and 2020, according to the Wall Street Journal.

And all of those prospective homeowners flocking to the city are fighting for the same small pool of houses. In fact, Austin has just about 1.2 months of supply, and has seen a 19.7% year-over-year increase in home values.

Rapidly accelerating home prices come with a variety of challenges for lenders and real estate agents, including one of the biggest pain points right now — the appraisal gap.

Jay Garrett, a loan officer at Supreme Lending’s McClellan Branch in Austin, said he is seeing 10 to 40 offers on houses no matter where they are in Austin, and cash offers are winning the day because sellers don’t want to have to worry about the house appraising too low for someone who needs financing.

“If a seller has those multiple offers, they are looking first at cash offers and may even consider a lower cash offer because they don’t have to worry about the property appraising for that price,” Garrett said. “If they get a higher offer that has financing, then when appraisal comes back, the buyer is going to renegotiate the sales price to be closer to appraised value.”

Garrett said aside from cash buyers, he also has clients who have money to offset any appraisal gap. These buyers are often from out of state, Garrett said, and when they compare what they are getting for the money in Texas compared to what that buys them in California, New York or the Chicago area, they are willing to make up the difference.

Some comps are finally catching up to sales prices, but rising house prices continue to push the goalpost, making it a challenge for appraisers to value properties in the area, according to Garrett.  

Joel Richardson, a PrimeLending branch manager in Austin, said the entire area around Austin is seeing huge demand.

“Just take a compass, put the point anywhere in Austin and draw a 50-mile circle. From Fredericksburg to Boerne to north of San Antonio…you name it. It is just a super tight housing market. I haven’t seen anything like this here, and I’ve been doing this since 2000,” Richardson said.

That demand has stretched appraisers, Richardson said. The usual 10-day turn time for an appraisal is now often three to four weeks, and appraisers can charge a premium.  

“There is so much demand they can call their own shots or cherry pick,” Richardson said. “If you ask for a rush job, they say they can’t do rushes right now because they have so much in the pipeline.”

Richardson also noted that there have been fewer property inspection waivers issued by Fannie Mae in the last several months, keeping appraisers, inspectors and others in valuation very busy. That could be because of the winter storm that hit Texas around Valentine’s Day, causing significant damage across the state, or just a reaction to the appreciating market. Either way, it puts the squeeze on property valuation.

Real estate agents and lenders are working together to try to get buyers into houses. Making the winning offer means being prepared for that appraisal gap, among other things, which requires lenders to be more agile too. Richardson regularly runs calculations to figure out how to maximize liquidity, knowing they are going to need all the cash they can get.

Compass agent Barbara Van Dyke, who worked in luxury real estate in Hawaii before moving to Austin, noted that with prices rising so fast, she’s checking what’s gone under contract in the last week and how many hours or days those properties were on the housing market in order to advise clients on what they should offer. Even clients with homes priced over $1 million have seen up to five offers this year, she said.

“Prices have increased 30% since the first of the year, and they are changing daily. At this point, looking at what closed in January feels like ancient times compared to just earlier this month. I’m looking at the last couple weeks trying to gauge what is the percentage properties are selling over ask,” Van Dyke said.

To be competitive, she might advise prospective homebuyers to offer to pay what are normally seller’s fees, like title fees and the cost of the survey. She might also recommend increasing their earnest money to 2% or more, offer a very large option fee for a very short amount of time and even waive buyer’s approval. One thing she does not recommend — unless the buyer is a builder or other very experienced player — is waiving the option period.

All of these tactics are new to those in the Austin area Van Dyke said, but wouldn’t be surprising to those used to competitive housing markets elsewhere.

“I think what’s going on is a shock to people in the Austin market,” Van Dyke said. “But in other competitive markets this is what it takes to buy a house. I had a client last night, when I explained what we needed to do, she said ‘Don’t worry, i understand — we need to New York it,’ which means to buy the property you have to go way over asking and make up the cash difference.”

Van Dyke said she is seeing other scenarios familiar to those in the Bay Area that used to be foreign in the Austin housing market, like camping out for days to snag the remaining lots builders are offering. Van Dyke is regularly checking with builders for several clients – most are sold out of lots until 2022. One new community that is going online in June may have to assign lots by lottery due to demand.

For native Austinites looking to buy, especially first-time homebuyers, the changes may necessitate moving farther out.

“Those young first-time buyers, who don’t have a high credit score or lots of cash, they need to understand that they’re probably not buying in Austin,” said Van Dyke. “They may have to look on the fringes of the city, or in counties far to the east of Austin. They can’t buy in Austin because there is nothing for them to buy.”

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