Guest Blogger: Will Elias

Will Elias is the founder of Elias Realty, with locations in Livonia and Brighton. Specializing in short sales, Elias, a licensed real estate agent, established Elias Realty in 2011 after working in the real estate industry for over eight years. Within the first year, he grew the business of nearly 100 employees, managing more than 700 listings across metro Detroit and Ann Arbor. He is also the president and CEO of Elias Debt Management, Elias Financial and Elias Tax & Accounting.


How to Counter the Low Appraisals Stunting the Housing Market

The housing market is up 19% from a year ago and in many areas of metro Detroit, there are more buyers than sellers. But even more challenging than low inventory of good homes is the appraisal process. An appraisal is just one person's opinion, but it can make or break a sale. According to a survey by The National Association of Realtors, 35% of all deals are canceled, delayed or renegotiated to a lower price because of low appraisals.

Banks will not lend more than a house is worth. That's where appraisals come into play. If an appraisal is lower than the price in the purchase agreement, buyers are either forced to pay the difference out of pocket or attempt to renegotiate with the seller for a lower amount.

At Elias Realty, we've seen appraisals come in above and below the price on the purchase agreement, but the trend is low appraisals. The largest gap we've seen recently was an appraisal that came in 30% below the agreed upon price in Westland, but it's happening all over metro Detroit and the United States.

There are a few big problems with the current appraisal process:

Fear of blacklisting
Appraisers are fearful of banks blacklisting them. The bank can decide whether or not they will accept an appraisal. If they don't accept, the buyer needs to either pay for another appraisal or walk away from that house. The industry doesn't address the arbitrary decision of a bank to decide whether or not to accept an appraisal. Appraisers understand that if their value comes in a little low, they are safe from being blacklisted, so many are being conservative.

No standard on which comparables to choose
Appraisals are opinions based on the value of comparable homes sold within a mile of the home in question and within the past six months, but there is nothing that says the most similar and most recently sold homes must be used. Because the law makes it difficult to challenge them, many appraisers will skip higher priced comparables to come in with a more conservative appraisal. They know that if they come in $10,000 under value, the banks won't mind, but if they come in $2,500 over value it will be an issue.

Laws prevent the ability to effectively challenge an appraisal.
The current appraisal laws are a result of The Dodd-Frank Wall Street Reform and Consumer Protection Act. As a result, nobody is allowed to contact the appraiser so when an appraisal comes in lower than expected, it is very difficult to challenge the appraisal. To challenge, a third party appraisal management company needs to be contacted to review the appraisal, but the reality is 98% of the time, the appraisal will not be adjusted.

Right now, there is nothing buyers, sellers or agents can do about a low appraisal, but the housing market would be up a lot more if we didn't have such stringent appraisal issues. It's getting so bad, there is talk about trying to change it, but there are currently no alternative options.

I believe that an adequate solution is the creation of an appraisal review board. The board should be a separate entity from the banks and appraisal companies to provide a true outside opinion. They would be available to truly review appraisals and the comparables used to determine if there is merit to adjust the final value. They would also monitor trends of appraisers to be sure they are choosing the best comparables for the area and would identify appraisers who are skipping comps to keep their values conservative.  Lastly, a bank should not be able to blacklist an appraiser without reporting "bad" appraisals to the board.

The bottom line – appraisals are holding back our housing market and it needs to be addressed.