The Appraisal Gap
Many people like pushing the limits and breaking new ground. Not real estate appraisers.
A cautious, methodical breed, many appraisers have found themselves in the uncomfortable and risky position of sizing up Southern California homes whose sales prices have ballooned way beyond any recent comparable sale. Pity the poor appraiser then who must prove to a skeptical lender that a house is worth its $225,000 price tag when the most recent and highest comparable sale, or “comp,” was only $200,000.
“The first guy to break the [price] barrier is going to have a problem,” said Kenneth J. Kaiser, who owns a Duarte-based appraisal company.
Appraisals are commissioned and used by mortgage lenders to make sure a house doesn’t sell for more than it’s worth. A home sale could fall apart if an appraiser determines that the market value of a property is lower than what the buyer is willing to pay.
The risks of overly ambitious appraisals came to light in the 1970s and ‘80s, when real estate busts revealed inflated property values and shoddy methods. Fraudulent and inflated appraisals contributed to the failure of several thrifts during the late 1980s, leading to greater government scrutiny and regulation. California, for example, required appraisers to be tested and licensed beginning in the early 1990s.
Getting a fix on current values is never easy. But it is particularly difficult when the real estate market starts to change, as it recently has in Southern California, where many neighborhoods have seen prices rise sharply after years of stagnation and decline. It’s a time when appraisers often find themselves pitted against real estate agents and homeowners, who are eager to cash in on higher values.
A recent deal nearly collapsed for Fred Sands real estate agent Stephanie Vitacco after the appraisal of a San Fernando Valley condominium she sold for $91,000 came in at the mid-$80,000 range. After Vitacco argued that prices were finally moving up, the appraiser raised his market value by several thousand dollars and the seller cut his price by about $1,000, she said.
“I have to do a really good presentation to show [the appraisers] where the market is going,” Vitacco said. “If you rely on the last comp, [prices] will never go up.”
Most lenders like to see an appraisal that’s in line with at least three nearby comps that have been recorded with county officials within the last six months. But even the most recent comp may be several weeks out of date because of the lag between the time a sales price is agreed upon--usually when escrow opens--and when the completed transaction finally appears in county records. As a result, a fresh comp will fail to reflect current values, especially as prices are just beginning to take off.
“The one weakness of our system is that everything is historical and it takes awhile for us to get that new data,” said Joseph Baldino, president of the Los Angeles chapter of the National Assn. of Independent Fee Appraisers Real Estate Appraisers.
To make their case and support new, higher prices, appraisers use recent list prices, pending sales in escrow and the speed at which homes sell to supplement comps. But this requires more footwork, investigation and cooperation with agents to provide evidence that will establish a new benchmark for neighborhood property values. Lenders will also apply more scrutiny to such information than they would to an appraisal based solely on comps.
“If you do a good investigation and know what’s going on in the market, you should be able to get an accurate appraisal,” said William J. Grimm as he inspected and measured a Pasadena house. “The first one or two homes to go [much higher] will be difficult because there is no proof” of increasing value.
Many real estate agents working in neighborhoods where prices have been soaring have become well-versed in defending their sales prices to skeptical appraisers. Based on recent sales, Linda Semon, an agent on the Westside of Los Angeles, knows her new Brentwood condominium listing will sell for at least $15,000 more than the most recent comp, and she’s ready to support her price when the appraiser arrives.
“I’m going to say it’s in better condition, it’s a corner unit and it’s a hotter market,” said Semon, who will also provide a list of pending sales and current listings. “You have to work with them when the market is going up.”
Despite the assistance of agents, many appraisers still struggle and fail to justify a sales price even when there is a willing buyer. Baldino recently completed an appraisal of a three-bedroom Granada Hills home that sold for $257,000. But Baldino said he could only justify a price in the $240,000 range after his review of recent sales and other information. Perhaps in two or three months, Baldino said, there will be other evidence that will support such a price. “But today there is no way on Earth that I can prove it.”
