Several weeks ago I was appraising a property that had been extensively updated. Since it was updated extensively using very good materials and quality, needless to say there was a lot of interest in it. As is the case with many sales currently, it had multiple offers. However, my estimated market value was considerably less than the purchase price. And I found excellent sales that had recently sold in the same development. They were also updated to a comparable degree. Even with the time adjustments made, there was nothing selling in the neighborhood that came even close to the contract price.
So, not surprisingly, I received a call from the listing agent. They had obtained a copy of my appraisal from the borrower, I assume. The listing agent was very professional. However, as you might imagine, they were upset at my estimated market value. They did not complain about the comparable sales that I utilized. They asked how they could contest the market value. I told them that if they could find comparable sales that are better than the ones I used, to provide them to the lender, who will in turn ask me to examine them as to whether they might be able to be utilized. The realtor then said that there are no comparable sales that have sold higher than the ones I used. The realtor then inquired about how values increase in a situation like this.
Good question! One answer is cash. The realtor acknowledged that there were other buyer's that were willing to pay the difference between the appraised value estimate and the purchase price. The realtor said that they really wanted to see the current buyer purchase the property because they were "in love" with it. Unfortunately, being "in love" with a property is not enough to own it. Emotion and financing do not go hand in hand. Since there were other interested individuals who were willing to pay above current market value for the subject using cash, the current buyer has been priced out of this transaction. Whatever the case, if a buyer pays for the difference between the appraised market value and the contract price, and that property sells, it will become a potential comparable sale, with a higher sales price. That will increase the value of homes comparable to that one in that neighborhood. That's one of the right ways to increase value.
We live in a society in which the cost of borrowing money has been relatively low for many years now. Today many people use credit cards to pay for things as simple as a cup of coffee or a lunch at a fast food restaurant, myself included. It's difficult to even break a fifty dollar bill many times. Many people would rather borrow money than pay cash. I remember prior to 2008, being in what feels to be a very similar situation to the one we are in today. At times, people were willing to pay more than market value for a home and some lenders apparently didn't have a problem with that. If they didn't like my value estimate, they would simply find another appraiser that would find a way to appraise the property at the number they wanted. Of course, then came 2008. Many who purchased homes around that time became upside down on their loans in a relatively short period of time. Some of this was due to inflated appraisals and irresponsible lending and borrowing. Since people didn't have a lot of their own money invested in some of the properties purchased at that time, many simply walked away from their homes and loans.
Fortunately, there are now laws in place to keep this from happening. I am grateful for many of the current regulations that have been put in place since 2008 that protect not only the appraiser but also the consumer and lender. I also truly believe that most of the appraiser's today are good appraisers who are doing good work! This will go a long way towards protecting the public trust and help to protect buyer's as well as lenders from what took place prior to 2008. And yes, values can still increase! And in many areas they are! They just need to increase the right way! When that happens, in the long run it's good for everyone!