A few weeks back I shot a quick (and windy) video describing the uptick in appraisal gap guarantees being offered by buyers in multiple offer situations. You can check that out HERE.
For those who don’t speak fluent Real Estate terminology, the short version of an appraisal gap guarantee is this is:
1) Buyer makes a strong offer to beat out multiple offers and agrees to pay up to $X in cash if an appraisal comes in under the offer price.
2) An appraiser is supposed to be a third party non-biased opinion confirming the market value of the home using past sales in that neighborhood.
Price confirmed = everyone moves forward to closing
Price undervalue = buyer has to make up the difference in cash up to what they agreed to pay if the appraisal came in low
Price overvalue = buyer has instant equity in home.
The issue with confirming value with appraisals before moving forward to closing is two fold:
1) Our market has appreciated more than 9% in the last 3 months due to the shortage of homes
2) Appraisers pull from past sales – many of which were last year in the neighborhood and don’t reflect current buyer activity.
In almost every multiple offer situation I have been in during the last month, the winning offer has made some sort of appraisal guarantee. First I saw 1-3,000, now I’m consistently seeing 10,000 guarantees by buyers. Listing agents are cautioning their seller clients about the tales of appraisal shortfalls when reviewing the offers and in the name of the surest closing strategy, sellers are leaning into buyer guarantees.
I’ve had this conversation with many people and a common response is, “That’s greedy.” or “Buyers are throwing away their money”.
I think there are way more factors at play than to point straight at greed as the core of this issue.
Appraisers are valuing based on past sales, sometimes a year old. We are under a month of inventory for housing in West Michigan with a strong surge of local and relocation buyer demand. And interest rates are historically low which means that buying power goes further and offer prices are going up.
Just in our brokerage, we’ve had appraisals on both sides come in at value up to 35K under value. Again, because of lack of comparable sales and in one particular incident – an appraiser’s attitude.
We had a listing in an established neighborhood. Comps were available. Sellers put in over 100K worth of renovation work before the property hit the market. We received an offer on the first day 10K higher than list price and the sellers accepted. (YAY!)
After requesting that the sellers be home for an appraisal, he showed up ready to do the appraisal in the home without a mask. Then, when he was denied entry to the home without it, made a show of going back to the car in defiance and stomped through the rest of the appraisal (I realize it sounds like I’m exaggerating. I am not).
Appraisal came in 35K low.
We challenged it.
New appraiser came out, did the appraisal, came back 5K low.
Nothing about the house changed. Just the appraiser.
We need to pause here.
What seems like should be a very scientific and systemized process – is not.
Appraisers have over 15 systems to pull data from and three sets of eyes on the report but, really, an appraisal report is educated navigating and preference in choosing – not standardized market valuation.
And again, it looks backwards at sales to justify valuation.
I have personally seen the same newly constructed home receive valuations $50,000 different within a month of each other based on the appraiser’s choices in comparables and (believed) personal opinions about the neighborhood.
Let’s spend a moment hanging out in the future. If buyers continue overbidding and paying cash for appraisal shortfalls – what happens? Are we going to crash.
I have another blog that dives deeper into my thoughts on recession you can check out HERE, but I have no reason to believe this is a repeat of 2008.
Buyers monthly payments are fixed and credit score requirements are WAY higher than the no-score loans they were doing in 2004-2007.
The interest rate on these fixed loans is ridiculously low and not scheduled to change for a borrower.
And appraisers can continue looking at past sales with new price data to justify the valuation moving forward.
All said, these next 6 months will continue to be a tension point between appraisers and buyers as the new market data becomes available and referenced and more homes hit the market to (fingers crossed) balance supply and demand in our area.
Feel free to comment with any questions.
We’re happy to help!
IHeartGR Real Estate
Tiffany Szakal Broker | Owner