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While reading my real estate brokerage's message boards, I noticed that agents were reporting home appraisals coming in low. There were rumors of appraisers never even entering properties due to COVID-19, instead of basing the appraisal on multiple listing service (MLS) photos.
This is not exactly new: There are circumstances where an exterior-only or desktop appraisal is ordered. But appraisal standards appear to be greatly relaxed because of COVID-19 concerns. What effect does that have for investors?
The appraisal climate during COVID-19
Only history will reveal whether the reaction to the COVID-19 pandemic was warranted. Were the health precautions done correctly? Were they effective? What were the economic costs? One area that was likely affected was real estate home prices, which are largely based on the appraisal report.
During COVID-19, the Federal Housing Finance Agency (FHFA) ordered Fannie and Freddie to relax appraisal standards. (The FHFA is the government agency established after the 2008 housing crisis to regulate Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System.) These relaxed standards have resulted in a mostly negative effect on home prices, making it difficult for sellers trying to sell a home, buyers trying to get a high enough loan amount approved, and investors trying to refinance loans to buy more properties or to make the numbers work on new investments. Not a pretty picture.
Because the FHFA has a "mounting concern" about the coronavirus, this government agency is allowing drive-by and desktop appraisals in lieu of the better and more accurate internal and external (traditional) appraisals. Here are some boots-on-the-ground recounts.
What's happening across the country
"We have noticed that home appraisals in our area are coming in slightly lower. We haven't had anyone refuse to go into a home, but we have asked that appraisers wear gloves and masks. Most people believe they are protecting themselves by doing so."
-- Nathaniel Hovsepian, owner of The Expert Home Buyers, a real estate investment company in the Central Savannah River Area (Georgia and South Carolina)
"Our market initially slowed [due to COVID-19] but never stopped and values are steady to slowly rising." -- Jim Whatley, real estate broker for Uber Realty in Fort Walton Beach, Florida
"The appraisals we have gotten on the houses we are buying or selling have come back, on average, 17% lower than expected during COVID-19.
"The real issue in the market is that there are a lot of distressed situations. Distressed homeowners who had their homes on the market are selling at discounted rates to offload the property, while homeowners in good standing are holding onto their [asking] price and not selling. Since appraisals are based on recently sold properties, the [distressed sales] are negatively affecting the value of surrounding properties."
-- Shawn Breyer, owner of Atlanta House Buyers in Georgia
"Those [appraisers] who are doing the full interiors are asking for flexibilities from the occupants, such as opening all doors, turning on all lights, and vacating the property during the appraiser's site visit. The appraiser then takes the precautions of using a mask, using disinfectant wipes, booties, etc., and trying not to touch anything. It does take away some of the human aspect but is still a viable way to complete an observation."
-- Rachel Massey, Certified Residential Appraiser, Ann Arbor, Michigan
"There has been a squeeze of lower appraisals for investment properties for both purchase and refinance transactions. Some lenders we have worked with in the past will not fund the purchase or refinance of investment properties at this time."
-- Chris McDermott, real estate broker and investor at Jax Nurses Buy Houses, a real estate investment company in Jacksonville, Florida
"I've had a couple of appraisals come in low during the pandemic. There were some notes on them about the changing environment due to the pandemic, which they did factor into their final number." -- Al Wisnefske, Realtor in Wisconsin
"[Low appraisals] seem to be more common for property listings that don't have many interior pictures or a video walkthrough. In these cases, the appraiser must rely on the existing available data from third-party sources, and some take a conservative valuation.
"Some appraisers are definitely concerned about conducting an interior inspection. Some appraisers don't feel the risk to their health is worth the pay. Other appraisers can't survive financially off desktop and exterior appraisals only. These types of appraisals may command as little as half the fees compared to a traditional appraisal." -- Caleb Liu, owner of House Simply Sold, a Southern California house flipper
"I've noticed that ever since quarantine began, home values were suddenly coming in low from appraisals. It's not that appraisers are refusing to go inside of homes; it's more likely that homeowners would rather not risk themselves being infected -- that's why appraisers are finding less work in these hard times.
"A low appraisal on a well-maintained home creates a vacuum of money. The homeowner would rather wait until the value of the home goes back up versus selling immediately. This causes the timeline for the purchase of the home to be stagnant."
-- Eugene Romberg, of We Buy Houses in Bay Area, San Francisco, California
The effect of low appraisals
For investors who are relying on a loan, a low home appraisal can be a deal breaker, as lenders might not lend at all, or if they do, at more unfavorable terms. Low appraisals can also nix both fix-and-flip and buy-and-hold cash-buyer deals, as they could signal a bad investment and the low appraisal could be an indicator of bad times ahead.
How agents are combatting low appraisals
The best method of warding off a low appraisal and ensuring an accurate valuation is to be proactive. Agents can provide appraisers with a list of upgrades and accurate comparables. They can also hire a professional photographer/videographer to take well-lit photos and a video walkthrough, perhaps with 3D technology.
The bottom line
The "new normal" hasn't exactly been great for the real estate business. Although it probably would be preferable for the appraisal business to return to "old normal," it might be wise for real estate investors to prepare for a pivot. Virtual appraisals will likely be more common in the future. As long as everyone is on the same playing field, the appraisals should better reflect the market once again.
If you're planning to invest in property, you might wish to instruct your real estate agent on how to prepare an appraiser. The more you take control of this out-of-control COVID-19 world, the better off you could be.
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