Bargain Hunters Beware not everything is a bargain

By: Ric R

Bargain-hunters have definitely been on the prowl in the real estate industry and not just on Amelia Island or in Fernandina Beach. Traffic and closings have been up recently in the real estate business. Hooray!!! Sadly, many of the sales for any home that is going into pending status today will come from this large group of distress sales.

Something else that is very troubling has recently developed in the real estate market. Real estate appraisers are now being instructed by lenders to use comparable sales that are … NO OLDER THAN 90 DAYS AND NO FURTHER THAN 1.5 MILES FROM THE SUBJECT PROPERTY.

Let’s think about what this means. We know that sales in the last three months have picked up a little bit. However, about 30%-40% of them have been either heavily discounted foreclosures or short sales.

Bargain Buyer Beware

I just finished a phone call with my mortgage officer. He told me that he recently had this exact situation on one of his loans, and it killed a potential sale. Both the buyers and sellers of a regular re-sale agreed to a $420,000 selling price, but when the appraiser searched for recent sales within the new parameters described above, all he could find was one short sale for $370,000. Because there were no other sales at a higher value, now the lender will not approve the loan on a sale price above $370,000!

For years, even well before the real estate market went into “bubble” mode, the appraisal standard was to use comparable sales from the prior six to 12 months, and one could search within a two-mile radius from the subject property. However, safeguards were still in place. An appraiser had to use any closed sales from the same neighborhood first, before being able to branch out to the two-mile radius. Recent sales were still given priority to a sale from 10 or 11 months back. These rules were regarded to be both fair and as contributing to reliable home values.

Revised Appraisal Standards are Totally Arbitrary

However, the new standards are capricious and arbitrary, and could very well force the general market to come down to where foreclosed homes are currently priced. This would have several negative effects upon the real estate market:

  1. Many people who need to sell will be forced to take their homes off the market because they will be “upside-down” (i.e. owing more than the sale price) if they have to sell at appraisal price. These are not people who are behind in their mortgages, or in any way in need of a short sale. They simply will not be able to sell.
  2. Some sellers who are current in their payments, yet unable to sell at the lower prices, will just decide to let their home to go into foreclosure, or will ask their lender to consider a short sale. This will increase the distress numbers and lead to further downside pressure on home prices. Since no lender will do a short sale without the homeowner being at least three months in default, this will force people who previously had excellent credit scores, to ruin their credit by purposely defaulting on their loan.
  3. People who need to sell their homes in order to buy another home may find themselves unable to do so, even if the home they are buying also becomes cheaper. Without a profit from the first sale, they will lack the down-payment money necessary to purchase the next home.

So here we are with another catch 22 in our suffering market.