Appraisals Turn Tricky

Small signs of recovery in Northwest Arkansas’ housing market are heartening both to homeowners and those who work in the real estate industry.

But even with home sales and prices on the rise, deals may hit a snag when an appraisal comes in far below the price the buyer and seller have agreed on. When that happens, mortgage lenders may be unable to approve the amount the buyer needs to borrow.

“Then the seller and buyer have a decision to make,” said Ernie Penn, a senior vice president at Arvest Mortgage Co. in Farmington. “If the seller wants to sell their house, they’ll negotiate down to the fair market value.”

Penn, who has seen lots of ups and downs in the housing market in his career that started in 1976, said the key to a good appraisal is having good comparable sales, meaning recent sales of similar houses near the home in question.

And therein lies the problem, local appraisers and lenders say. After several years of sluggish sales and low pricing in the wake of the nationwide housing and banking debacle of 2007, there aren’t enough sales on record that reflect the recent market uptick.

David Parrish, owner and chief residential appraiser at Parrish Appraisals Inc. in Fayetteville, explained how appraisers comb recent sales data on homes similar in square footage, amenities, location and other factors to the one they’re trying to set a value on.

Coming out of a tough market, though, there may not be any recent sales in that particular neighborhood, he said, or a home that did sell may be too different to be considered a good comparison. And that’s especially true in the $800,000-plus market because there are fewer buyers for those homes.

Complicating matters even more, Parrish said, is the fact that home prices have been held down for several years by large numbers of foreclosures and short sales.

And now that those homes are going off the market, he said, housing price averages appear to be rising when in fact they’re not.

“The truth of the matter is the economy is coming back a little bit, and we’re having less repossessed houses and short sales because not as many people are going broke,” he said.

“So what’s happening is those averages from a year ago look lower than today, but it’s not because prices are going up but because there’s less junk on the bottom dragging them down.”

Kay Weiderhaft, mortgage market leader at Bank of Arkansas Mortgage Group in Bentonville, said it’s not just in the high-dollar range where lower-than-expected appraisals are an issue. But she said it’s more predominant in the luxury-home market because fewer sales in a particular price range mean fewer comparable values available for appraisers to use in future sales.

“An appraiser gave me a term one time that was particularly well put,” she said. “It was this ‘trailing data scenario,’ where you’ve got to have so many happen before the next one comes around. So if you’re the first one out of the gate to pay $120 a square foot, and there haven’t been a whole lot of $120-a-square-foot sales, you’re not going to have a lot of data to support it.”

Overall, Northwest Arkansas has “enjoyed a really nice pickup in value and in appreciation,” Weiderhaft said.

Still, she said, it seems that when home prices were declining, the appraised values declined much faster than they have been to rebound now that prices are going up.

Stressing that she’s in no way being critical of appraisers, she said they’re making less use of a tool called time adjustments that they used when prices were falling.

Back then, she said, an appraiser might explain low numbers by saying, “Well, that might have appraised higher 12 months ago.”

“Well, my argument is, OK, let’s use time adjustments when things are increasing,” Weiderhaft said, “If a market increased by 13 percent in a year, then certainly I think it would stand to reason that you could take a particular piece of property and extrapolate that the value of that property would have increased from the time it closed.

“But it’s really difficult under the guidelines [appraisers] have got right now to do that,” she added. “They are so restricted. They just are under a significant amount of pressure, in terms of the guidelines from both Fannie [Mae] and Freddie [Mac] and everybody else.”

Appraisers also get pressure from lenders, Weiderhaft said, “because we have guidelines as well, that, if we’re looking at appraisals, and we see that there’s large variation between comparables and the subject property, they can be called into question.”

Weiderhaft said the appraisal process is less prone to error now than it’s been in the past, because of increased guidelines, more specific rules and more quality control.

Penn said lenders are seeing more purchase activity, pointing out Arvest did a record amount of mortgage loan originations last year — more than $1 billion worth.

“Where it was about 75 percent refinances to 25 percent purchases a few years ago, now we’re seeing almost 60-40 on purchases versus refis,” he said.

Penn remains sold on the future of Northwest Arkansas real estate.

“The market is more stable, it’s more realistic,” he said, “and then I think people are looking at reasonable expectations for their homes, and not the inflated amount that was being sold for five, six or seven years ago.”