Overpriced properties and escalation clauses

[Tower Appraisals]

I wanted to drop you guys a post and see if I can maybe get a little guidance. There has been a sharp rise in recent sale prices in pocket neighborhoods here in Washington State.

I have prepared a moderate amount of appraisals for lenders recently for purchase transactions, in which a decent sized portion of these reports do not support the contract price. On occasion, they do not even support the MLS list price.

Agents and homeowner's here are getting more agressive with their list prices, increasing them at an alarming rate. In some cases, a large amount over recent sales on the same street within less than a month. We are back to having multiple offers on properties with built in escalation clauses, increasing the sale prices to levels that are wholly unsupportable by recent similar sales.

Agents argue with me that the value is what a prospective buyer and seller have negotiated the sale price to be, regardless of what comparable sales show. "It is what somebody is willing to pay for it" to quote a recent conversation. On the other hand, a lender will typically require closed comparable sales that bracket the subject's features and sale price from within the last 6 months. USPAP has it's own very clear definition.

I'm finding it increasingly difficult to prepare appraisal reports for purchase transactions as the lion share of the reports do not support the contract price. The reason for the difficulty is that over the last few months, I have had a disproportionately large amount of phone calls and emails from agents, borrowers and sellers complaing about my appraisal reports. These typically are conversations where I'm being accused of not acurately reflecting market trends, not giving due dilligence in my research and not using "good" comparables (agent's exact words). In other words, not using sales that support the elevated sale prices. I'm finding that these sales just simply do not exist.
In most cases, the subject's list price will be the highest in the neighborhood. This shows that values are increasing in the neighborhood and that there is a healthy demand, that people are willing to bid, escalate and pay higher than market values for these properties, however when I am called to prepare the report, the estimated market value I arrive at does not support the sale price. The agreed upon sale price's are just too high to be supported by recent sales.
I'm trying my best to only use sales that closed within the last 3 months, with my main focus being from within the last 30 days. On the grid I make a time adjustment if warranted, however even then, with the agents and homeowners listing homes so much higher than ones that closed within the last month or two, the estimated market value will typically come in less than the sale price.

I wouldn't mind hearing if there is anything that can be suggested or tips that can be shared from my peers to help overcome the recent surge in unsupportable sale prices and the inevitable fallout that ensues after an appraisal report has been submitted that is too low to support the sale price.
A moderate increase in value I can handle. A 7% increase in value in less that 1 month is unsupportable with sales from within the last 3 months and finding arguable justification for the increase in value to that high of a level is nonexistent. I can't just put on an addendum that there are multiple offers, all with escalation clauses, bidding the property up to so much higher than other recent sales, and then increase the value with no real world justification other than that commentary and no supporting comparable sales. Or can I? Pretty sure that the lenders I deal with won't buy it. I don't think a paired sales analysis is possible for escalation clauses in a contract. I know that local market values have been increasing at record levels, and I try and account for these increases, however multiple offers with escalation clauses has never been a comfortable justification with me.
I know that I have to be the voice of reason in these cases as I am the unbiased person in the whole transaction. Over the last 10 years, there have been a lot of folks that disagree with my value estimates. Dealing with folks that are not appraisers that believe that the final value should be higher is part of the job. I typically take it with a grain of salt, however with the large amount of unsupportable sales within the last few months, I wouldn't mind knowing if there are any suggestions or recommendations that can be made to help alleviate the frustration imposed by these properties that I deem to be overpriced and unsupportable, but the agents, buyer and seller believes to be fair and are very vocal about it, even though they cannot provide 1 supporting comparble sale that is truly comparable.

I know that a property is what it is, but wanted to check in to see if there have been any recent changes in policy, verbiage, addendums, adjustments, etc. that you can share to help with the reports I submit for these seemingly overpriced purchase transactions. I am not looking for any continuing education or training as I believe I'm very capable of doing my job and I do keep in touch with my other appraiser peers across the nation to discuss recent trends and how to handle them. I am just checking to see if there has been anything notable that may help with these unsupporrtable sale prices, other than providing the most recent comparable sales, making a time adjustment if warranted and providing ample commentary regarding the recent trends.
Thank you for taking the time to read this extended note and for sharing any thoughts, ideas or suggestions regarding these recent trends.

 

[Randolph Kinney]

I wanted to drop you guys a post and see if I can maybe get a little guidance. There has been a sharp rise in recent sale prices in pocket neighborhoods here in Washington State.

I have prepared a moderate amount of appraisals for lenders recently for purchase transactions, in which a decent sized portion of these reports do not support the contract price. On occasion, they do not even support the MLS list price.

Agents and homeowner's here are getting more agressive with their list prices, increasing them at an alarming rate. In some cases, a large amount over recent sales on the same street within less than a month. We are back to having multiple offers on properties with built in escalation clauses, increasing the sale prices to levels that are wholly unsupportable by recent similar sales.

Agents argue with me that the value is what a prospective buyer and seller have negotiated the sale price to be, regardless of what comparable sales show. "It is what somebody is willing to pay for it" to quote a recent conversation. On the other hand, a lender will typically require closed comparable sales that bracket the subject's features and sale price from within the last 6 months. USPAP has it's own very clear definition.

I'm finding it increasingly difficult to prepare appraisal reports for purchase transactions as the lion share of the reports do not support the contract price. The reason for the difficulty is that over the last few months, I have had a disproportionately large amount of phone calls and emails from agents, borrowers and sellers complaing about my appraisal reports. These typically are conversations where I'm being accused of not acurately reflecting market trends, not giving due dilligence in my research and not using "good" comparables (agent's exact words). In other words, not using sales that support the elevated sale prices. I'm finding that these sales just simply do not exist.
In most cases, the subject's list price will be the highest in the neighborhood. This shows that values are increasing in the neighborhood and that there is a healthy demand, that people are willing to bid, escalate and pay higher than market values for these properties, however when I am called to prepare the report, the estimated market value I arrive at does not support the sale price. The agreed upon sale price's are just too high to be supported by recent sales.
I'm trying my best to only use sales that closed within the last 3 months, with my main focus being from within the last 30 days. On the grid I make a time adjustment if warranted, however even then, with the agents and homeowners listing homes so much higher than ones that closed within the last month or two, the estimated market value will typically come in less than the sale price.

I wouldn't mind hearing if there is anything that can be suggested or tips that can be shared from my peers to help overcome the recent surge in unsupportable sale prices and the inevitable fallout that ensues after an appraisal report has been submitted that is too low to support the sale price.
A moderate increase in value I can handle. A 7% increase in value in less that 1 month is unsupportable with sales from within the last 3 months and finding arguable justification for the increase in value to that high of a level is nonexistent. I can't just put on an addendum that there are multiple offers, all with escalation clauses, bidding the property up to so much higher than other recent sales, and then increase the value with no real world justification other than that commentary and no supporting comparable sales. Or can I? Pretty sure that the lenders I deal with won't buy it. I don't think a paired sales analysis is possible for escalation clauses in a contract. I know that local market values have been increasing at record levels, and I try and account for these increases, however multiple offers with escalation clauses has never been a comfortable justification with me.
I know that I have to be the voice of reason in these cases as I am the unbiased person in the whole transaction. Over the last 10 years, there have been a lot of folks that disagree with my value estimates. Dealing with folks that are not appraisers that believe that the final value should be higher is part of the job. I typically take it with a grain of salt, however with the large amount of unsupportable sales within the last few months, I wouldn't mind knowing if there are any suggestions or recommendations that can be made to help alleviate the frustration imposed by these properties that I deem to be overpriced and unsupportable, but the agents, buyer and seller believes to be fair and are very vocal about it, even though they cannot provide 1 supporting comparble sale that is truly comparable.

I know that a property is what it is, but wanted to check in to see if there have been any recent changes in policy, verbiage, addendums, adjustments, etc. that you can share to help with the reports I submit for these seemingly overpriced purchase transactions. I am not looking for any continuing education or training as I believe I'm very capable of doing my job and I do keep in touch with my other appraiser peers across the nation to discuss recent trends and how to handle them. I am just checking to see if there has been anything notable that may help with these unsupporrtable sale prices, other than providing the most recent comparable sales, making a time adjustment if warranted and providing ample commentary regarding the recent trends.
Thank you for taking the time to read this extended note and for sharing any thoughts, ideas or suggestions regarding these recent trends.

Question: How many of these recent sales are all cash sales? Would that be telling you that the price appreciation is real?

If your data set has resales of the same property during the last 12 months, you can use that to show the appreciation rate, after accounting for changes in the property for upgrades. These properties may have been distressed sales that were fixed up and flipped by investors.

Question: How many properties had multiple offers? This can be indicated by having a higher sold price than the listing price.

Question: How many properties have seller concessions? As the market appreciates with fewer sellers than buyers, there is no reason for the seller to offer concessions.

Question: What is the supply (number of listings) and demand (number of sales) indicating?

Question: Are the current listings showing a higher prices than the past sold prices? Are days on market falling?

As you complete the analysis, you can paint the picture of the market dynamics. A positive time adjustment (even on recent sales) may be warranted.

 

[Restrain]

We are seeing offers at $5-10K over LP and multiple offers. DOM 0-3 days. Not investors, but normal folks looking for a home. Just a shortage of inventory and growth here. We have to explain the market and apply the appropriate factors.

 

[J Grant]

Agents argue with me that the value is what a prospective buyer and seller have negotiated the sale price to be, regardless of what comparable sales show. "It is what somebody is willing to pay for it" to quote a recent conversation.

Why are you having arguments and conversations with them? Don't talk to them about it, they' ll only argue with you. From their point of view, something is worth what the borrower will pay (or rather what the borrower will pay provided the borrower can borrow X% of it). Our job is to provide a MVO to OUR clients, of what per MVO definition and URAR certs of closed sales and other research/list activity says the property is worth. Sometimes the two don't match.


On the other hand, a lender will typically require closed comparable sales that bracket the subject's features and sale price from within the last 6 months. USPAP has it's own very clear definition.

Exactly. Agents would rather ignore that, or just slap on hourly time adjustments (sarcasm) that come out equaling SC price. Even with reasonable time adjustments, if their SC price is beyond support as al MVO, then it is. Buyer is welcome to put up cash difference, we all know that.

Randolph has given excellent suggestions. I feel sorry for u guys in CA, the prices there are accelerating beyond rest of country. I speak often with a good friend appraiser in CA, she also brings in MVO below SC price a fair portion of the time because of the rapid price increases that are not supportable. Other times , she can support them. However, she does not engage in "arguments" or conversations with RE agents and other parties...Why make your life so difficult and engage with these people? Tell them your client confidentiality is that you won't discuss value related issues with other parties to the deal. RE, don't return calls or answer emails.

 

[Ronald Hauser]

You have described what I am currently going through and it is very frustrating. I talked with an instructor about this and he said I was not accounting for what the current market is doing and I also needed to analyze the buyer and seller motives.

Let's say that the comparables in your report are
Sold/List Price 1) $270,000 2) $265,000 3) $255,000 4) $278,000 5) $285,000
Sold 5/30/2013 4/30/2013 3/30/2013 N/A N/A
U/C 5/1/2013 4/1/2013 3/1/2013 6/1/2013 N/A
Adjust Price $272,000 $264,000 $258,000 $280,000 $282,000
Seller Conc In Adj Price In Adj Price In Adj Price -$2,800 -$2,800
S/L Ratio $0 $0 $0 -$1,400 -1,400
New Adj Price $272,000 $264,000 $258,000 $275,800 $280,800
Time Adjust $8,000 $16,000 $22,000 $4,000 $0
New Adj Price $280,000 $280,000 $280,000 $279,800 $280,800

First adjusted price is adjustments made for property characteristic differences only and does not include sale to list price ratios and time adjustments. Seller concessions are dollar for dollar for increasing markets; otherwise you are artificially increase the market. Seller motives in this market is to sell and accept the highest net offer from the most qualified buyer and competition is not a factor due to limited amount of homes for sale. Buyer motives is to be the first, best qualified and highest offer.
In your analysis you determine that the typical seller concession in your market is 1%, the sale to list price ratio is 99.5 or 0.5%.

I know I will get beat up by some on here and will enjoy learning a few things that might help me to be a better appraiser.

 

[J Grant]

but the agents, buyer and seller believes to be fair and are very vocal about it, even though they cannot provide 1 supporting comparble sale that is truly comparable.

Again, don't allow them to be "vocal" about it. However, what you need to reinforce to yourself as an appraiser, and if you get stuck in an argument with them, this:

Yes, from their point of view, the price is "fair", worth what a buyer is willing to pay. However, since the buyer is BORROWING money in order to pay for the purchase, the AMOUNT the LENDER CLEINT is willing to lend will be based on the MVO of the appraisal, which must adhere to standards of development.

So, they are wrong. The worth of a financed property in a given transaction is not ONLY the price a borrower agrees to pay, it is the amount the lender deems appropriate to lend from LTV off an appraised MVO.

If the borrower were paying cash, then their argument would be correct, the worth of that transaction is the price a borrower agreed to pay, since there is no third party gatekeeper with some additional criteria in place to vet the transaction.

My personal hunch is that a portion of appraises who are deal facilitators are allowing unsupportable prices to be financed and thus setting the stage for the next sale to be higher...I bet not all are cash sales or cash amount over appraised value sales.

And thus the cycle is self propelling...if agents drive the market by intimidating appraisers into appraising to unsupportable or shaky support prices, the market does indeed accelerate sharply, and then the appraisers that do come in below unsupportable prices face relentless pressure and accusations that they don't understand the market or are "behind" it.

The OP sounds like they are doing the best job they can possibly do.

 

[Ronald Hauser]

J Grant - I believe the buyers ability to finance is equivalent to cash.

 

[J Grant]

was not referring to cash equivalence, yes, whether a buyer pays cash or finances the amount at closing is same to seller.

I was referring to the agent's argument with the OP about how a house is worth what a buyer is willing to pay.

In a financed property, one of the contingencies of the deal going forward at the LTV borrower applies for is the greenlight by lender of a MVO from an appraiser . The agents forget that part.

Therefore, in a finance contingency transaction, the house is "worth" , to the lender, what the MVO provides them, which may or may not match what the house is "worth" to the borrower in personal terms of wanting the house/trying to beat out another borrower etc .

 

[George Hatch]

In addition to the comments above about tracking trends and identifying situations where a substantial time adjustment may indeed be warranted.....,

The agents are working to their definition of value - one willing buyer + one willing seller.


You have a different definition of value - "most probable price" and the burden of demonstrating that rests on analyzing the trend over many transactions - not just the one.

The agents don't work to the definition of MV we are required to use and we don't work to their definition of value. The next time an agent tries to run that different definition of value on you just tell them that it's okay for them because of their role, but your role requires conforming to MV as defined and as required in banking regs. It's a hard requirement that you cannot avoid.

It's not even a matter of discretion on your part. You're just doing your job. Nothing personal.

Keep a real close eye on sp/lp ratios, not just for the direct comps in your report but also for the wider dataset. Also note months of supply and days on market. Don't worry about what you think should be or where the market could go wrong in the future - that's okay for idle conversation in this forum but there's no place for that in an appraisal report. Just stick to the data at hand.

 

[George Hatch]

What's LOL interesting is that we never had so many broken dreams out in the market back when the mortgage brokers ruled over their appraisers with an iron fist.