"Most standard real estate contracts, whether for residential or commercial transactions, contain financing contingencies. Not only does the seller want confirmation that the buyer has the financial ability to purchase the property, the buyer wants to make sure the property that is being offered for sale is worth the value.
Appraisals are very detailed reports used to establish a property market value — the likely sales price it would bring if offered in an open and competitive real estate market. The highest and best use is that use which produces the highest possible value for the property. Appraisals are done by qualified and certified professionals and are opinions of value. A lender will require an appraisal when you ask to use a home or other real estate as security for a loan, because it wants to make sure that the property will sell for the amount of money it is lending. Even cash deals utilize appraisals to ensure property value.
For the past decade, home prices have been steadily on the rise with better than average appreciation; it truly has been a seller's market. But as the housing market begins to cool and correct itself, many property owners are being confronted by a problem that was easy to ignore during the boom: elevated appraisals of property values.
Appraisals weren't a huge concern when prices were rising at double-digit rates since the market values would quickly catch up. Now that prices are leveling off and even falling in some places, some property owners are finding that the market value is less than what past appraisals had led them to believe."
"Interest rates drive the market," stated Clark Toleman, certified MAI appraiser. "Lower interest rates make property more affordable, and as interest rates increase, those properties are less affordable, translating to less demand and a less valuable piece of property."
Toleman further points out, "Value trends are a dynamic process. Appraisals utilize market transactions, therefore only very current sales will indicate a recent trend. When a price is reported to be below appraised value, it can be a reflection of many variables: old appraisals, flawed appraisals, sellers' circumstances, or sudden change in the market."
So, what does this mean to the property owner? For sellers, it may mean being forced to drop their asking prices, and for those hoping to refinance or those with adjustable mortgage rates, they have less equity in their homes than they thought. Most property owners don't need to worry if past appraisals were realistic and they did not live in an area of double-digit appreciation. But, does the appraisal system have a built in conflict of interest? Most appraisers are hired by loan officers, mortgage brokers or intermediaries, whose compensation depends on how many loans they close. A few appraisers have confirmed pressure by secondary market lenders and mortgage brokers to get the deal done by promise of increased compensation to make the deal go through, or threat of potential loss of future business if the number isn't made. These dubious appraisals pose a risk to those property owners who in the past few years bought homes with little or no down payment, or used up their home equity line of credit to finance either a home improvement or college tuition. These people can be left with little financial cushion to deal with rising interest rates.
Regulations passed in the late 1980s by Congress set standards for real estate appraisal practices after the Savings and Loan scandals, at which time real estate appraisal in almost all states was an unregulated industry. Kentucky adopted stringent new education requirements in February 2004, strengthening the industry even further. All certified appraisers in the state are governed by the uniform standards of professional appraisal practice. In addition, the Kentucky Real Estate Appraisers Board (KREAB) is an oversight entity in place to assure all guidelines are followed.
In conclusion, where does that all-important contract contingency stating that the "property must appraise for at least sales price or above, or this contract can be declared null and void by either party" leave us?
"Only the market will dictate what a property is worth," stated Ben Campbell of Ben Campbell Appraisals, a certified general appraiser who has been in the appraisal business in Lexington for over 29 years. "We have been seeing the market bring top dollars in a rising market, and now the market has begun to settle, so prices will soften. Supply and demand drives the deal. We now have a slight oversupply of inventory; because of that the values are not appreciating nearly as rapidly as we have seen in the past. Based on my years of experience as an appraiser, I have witnessed several up and down cycles, and based upon the current supply and demand, we appear to be heading towards a little bit of a slow down."
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