In another anecdotal sign that the housing market is improving, real estate experts are reporting bidding wars in residential real estate. In some markets, there are so few homes for sale that when a seller lists a home, several buyers make offers. The competition inflates the home price, but sometimes, the appraisal does not match the price.
‘I've seen the bidding wars get caused by a number of reasons,’ says Donald S. Boucher, president of the appraisal firm Boucher & Boucher Inc. in Washington, D.C. ‘Some agents I know will cause it. A house is worth a million, so the agent tells the seller, 'Let's list it for $900,000.' The buyer says, 'Oh boy, what a great deal,' and offers $925,000. Then multiple offers come in, and the agent says, 'We can get to $1.1 million.'’
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Boucher says the scenario looks familiar. ‘It's reminiscent of the days before the crash, but I think it's being fueled for different reasons,’ he says. ‘Certainly, low interest rates are causing people to bid up, and there is a lack of inventory that means there is demand but no supply.’
The challenge is that the winning bid might not reflect the real value of the house. ‘The appraisal is an inexact science,’ Boucher says. ‘We have to look at comparables and try to make sense of something that doesn't make sense. In rapidly changing markets, you want to get comparables as close as possible in time.’
The lender originates the loan based on the appraised value, so when the appraisal is lower than the buyer's bid, the buyer has to make a larger down payment. That can be a deal breaker, Boucher says, adding that this happens about 10% to 20% of the time.
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The seller then moves on to the next bidder, and that presents another trend that Boucher has been noticing lately. More buyers are paying cash for properties. For these consumers, the appraisal does not matter because there is no loan.
There is a bright side to that trend, says Lisa K. Hier, owner of Hier Appraisals in Castle Rock, Colo. ‘The other unique portion to that is when they bring cash to the table, that goes into the comparable pool for the area,’ she says. Home prices rise, ‘and your neighbors love you.’
The property value increase makes the appraiser's work challenging, but Hier says this is not a new phenomenon. ‘It's no different from when the market was declining. I would have to appraise the lowest sale in the neighborhood, and I had a hard time bracketing it. You need to look at other active listings under contract.’
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Dustin Owen, regional sales manager for Waterstone Mortgage Corp. in Winter Park, Fla., says that in the bidding wars he has been in lately, the resulting appraisals are about 2% to 7% lower than the bids.
‘Normally, you try to go back to the seller and renegotiate and try to buy it for the appraised amount,’ Owen says. ‘However, in today's competitive market, buyers are paying the difference in cash, realtors are chipping in by reducing their commission, and you have lenders who are throwing in lender credits to help make the deal work.’ A lender credit might be, for example, a $500 reduction in closing costs.
Those efforts are not enough for some buyers, Owen says. Borrowers who tap government programs are being squeezed out. ‘The seller thinks, 'Why would I ever go with a buyer who will take 60 days to close and is marginal because they need down payment assistance to do it,'’ Owen says. ‘There is also the perception that FHA and VA appraisals are more strict than conventional appraisals, but in my experience, that is a myth.’
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Years ago, Owen says, lenders could call appraisers and ask them to rethink their appraisals. ‘The Home Valuation Code of Conduct (HVCC) took away that communication,’ Owen says. ‘That's a good thing.’ The HVCC went into effect in 2009 and covers prevention of improper influence on appraisers, among other items.
Owen does not think low appraisals kill many deals, but he says the bidding wars and lack of inventory are drastically reducing the buyer pool. The lack of inventory might end as banks release the homes that they own, and the housing supply will return to a more normal six-month supply, compared to the current two- or three-month supply.
In a way, this is all business as usual, Boucher says. ‘There never seems to be equilibrium, where everything is normal for 10 years. It goes way too high, then corrects too low, and we have these peaks and valleys. Then you look at it over time and you say residential real estate appreciates six percent a year.’
Nora Caley is a Denver-based freelance writer.