Calculating Value

Industry experts explain why obtaining sound appraisals has been challenging in this unprecedented market

BY DICK HOGAN

As Collier County’s real estate inventory gets both scarcer and pricier, REALTORS® and property appraisers are using all their skills to help buyers navigate the trials of getting a home appraised due to low inventory, scarce comparable properties, and high expectations.

The supply of homes is drying up largely because of an influx of buyers investing in the market or relocating here, says appraiser Chris Magher of Magher Appraisals in Naples. It’s not unusual to have a pool of 20 buyers bidding on two homes, she says, “so they’re all outbidding one another.”

REALTOR® Christine Citrano of the Citrano-Batten team at John R. Wood Properties says that sometimes, there simply aren’t many houses to show a prospective buyer. “I remember several years ago, when I had a buyer coming into town to look at properties, I’d have three days when I was showing them 25 or 30 homes,” she says. “Now? I’m lucky if I have six to show them. It’s an inventory problem, pure and simple.”

As a result, it’s getting harder to draw a bead on a home’s value. Recently, Citrano and her partner were closing on a unique property. “It’s not in a gated community, it’s not cookie-cutter, it’s not a one-builder kind of community,” so obtaining accurate appraisals for the property wasn’t easy. “There were no comparable properties,” Citrano says. “Until you close, you don’t know what the actual value is going to be, and that is really challenging.”

This story turned out more or less happily. “The property ended up coming in over the appraised value and, fortunately, our buyer says, ‘OK, we’ll make up the difference.’ But I questioned the appraisal to begin with, simply because there weren’t enough comps.”

Situations like this—once rare—now aren’t unusual, Citrano reports. “There have been a lot of properties pending, waiting for appraisals to be done. The appraisal process seems to be taking longer because there is just an overall lack of inventory.”

The appraisal process seems to be taking longer because there is just an overall lack of inventory,” says REALTOR® Christine Citrano

Finding Comparable Properties and Neighborhoods

Appraiser Cindy Carroll of Carroll & Carroll Real Estate Appraisers & Consultants in Naples agrees that it’s a challenging and complicated time to be doing appraisals. Comparable sales (comps) “are hard to find, and there’s also the difficulty of extracting from the market the rate at which values are increasing,” Carroll explains. “Each neighborhood is different—and neighborhoods are going up at different rates of increase.”

And that rate of increase is no small thing. “It’s not unusual to see market rate increases at between three and five percent per month, compounded,” says Carroll.

Another way the scenario plays out is when the great expectations of the seller and listing agent bump into the hard ceiling of a market-driven appraisal, says William Dukes, senior mortgage loan officer of Naples-based

Summit Mortgage Corp. “Eventually, the comps do catch up a bit,” he says. “The big issue is when a listing agent goes in for a listing appointment and they already have in mind a robust listing amount that they believe will be aggressive, based on the comps they’re seeing. They go in with that seller and find the seller wants to go 10 percent above that. That is when it starts to cause an issue, because in those situations, you already have a REALTOR® who’s being aggressive and their seller is like, ‘Not good enough.’”

The appraisal issue comes up, Dukes says, when a buyer falls in love with the house and agrees to pay that seller’s dream price—but needs a mortgage to make the deal work. “It’s tough for that to appraise,” Dukes says, because the rules of appraisals don’t allow it. “Mortgages can never lead the way with appreciation. Cash leads the way.”

Whether a REALTOR® is representing the buyer or the seller, it’s important to alert them when the home isn’t likely to appraise at the agreed-upon price. “Otherwise, you end

Counting Comps

Here’s how the Federal National Mortgage Association (Fannie Mae) decides what comparable sales are OK for an appraiser to count:

NEIGHBORHOODS

Sales in the neighborhood are the gold standard, but similar neighborhoods are acceptable if that’s all there are. The appraiser can’t just expand the neighborhood’s boundaries to pick up some comps: The identity of the competing neighborhood and an explanation of why it’s comparable is required.

SAME THING

Comps should have similar physical and legal characteristics such as site, room count, gross living area, style, and condition. They don’t have to be identical but should appeal to the same buyers looking at the home being appraised.

TRUE OR NOT

If there are no truly comparable homes available, properties that aren’t truly similar may be used but the appraiser must explain why.

DISTANCE

The straight-line distance and direction the comp is from the home being appraised—for example, 1.75 miles NW— must be specified.

NUMBERS MATTER

At least three comps must be cited, and the home being appraised may be used as a fourth if it’s been sold previously. Contract offerings and current listings can be used as supporting data but don’t count among the three-comp minimum.

NOTHING GOING ON

If there’s been no activity at all in the area for more than 12 months, older sales may be used but the appraiser must explain why.

OTHER ACTIVITY

Foreclosures and short sales may be cited as comparables if the appraiser believes they are the best and most appropriate sales available.

SOURCE: Federal National Mortgage Association

up going down a dead-end road,” Citrano says, “and everybody’s frustrated.”

Sometimes, a buyer’s emotions can get in the way of clear thinking, Citrano says. “Your home, yes, is a financial purchase that you are making and a rather substantial one. But it is tinted with a lot of emotional value as well.” Once they sign the contract, “in their minds, they’ve already painted the rooms; they’ve placed the furniture. In their minds, they’re in that house.”

Ultimately, Carroll says, it boils down to “supply and demand, and in many market areas there are no listings.” In these cases, she advises: “The best you can do is research for the best, most recent, most similar comparables, go to the market and determine the market advancement for that given neighborhood and competently make adjustments for differences in valueinfluencing characteristics.”

A buyer who needs a mortgage but is really infatuated with a house sometimes decides to roll the dice—making a “cash offer” backed up by a non-refundable escrow, Citrano says. “You’re saying, ‘We’re going to buy this property, period. How we choose to buy it, we’ll figure out, but for all intents and purposes, we’re making this a cash offer,’” she says.

If the buyer is trying to finance, Citrano says, it can be a risky situation “because they are essentially putting themselves and, more importantly, their escrow money at risk if they don’t get that loan.”

A recent customer in this situation was tempted to walk, but “I said, ‘No, don’t do that. We’re going to leave too much money on the table,’” Citrano recalls. Ultimately, the buyer obtained the loan and closed the transaction. “But there were a few days when they were seriously thinking of walking away from six figures.”

When will these strange times end? As the Federal Reserve continues to ratchet up interest rates, Magher predicts these hikes will “slow the lower end of the market” of homes ranging from $300,000 to $500,000 because those buyers are typically younger people who need mortgages to buy their first home. However, she says, most sales higher than that are all-cash, so there’s no clear end of the boom in sight. “I don’t see it slowing down the overall market.”