The hidden impact: Low appraisals in a real estate boom
Experts weigh in on the extent of the problem here
According to recent findings from the Federal Housing Finance Agency, underappraisals (when the appraised value of a home is less than the agreed-upon sales price) spiked to 15 percent in 2021 and hit 12 percent in 2022 in the United States. How did it happen, and why didn’t we hear more about it at the time?
When buyers want to take out a mortgage, the lender requires a professional appraisal to ensure that the home they want to buy is worth more money than the loan amount. The lender doesn’t want to lend $1,000,000 to someone buying a $800,000 condo, because if the buyer defaults and the lender forecloses, the mortgage company won’t be able to recoup the loan balance. Cash buyers are not affected at all.
How it happened
Rick Lipof of Lipof Real Estate Services in Newton said prices rose so quickly in those years, it’s not surprising that appraisals, which are based on recent closed sales, didn’t keep pace, even with the adjustments they are allowed to make when the market is moving quickly in either direction.
“The lender does not want to lend at a maximum price in a frenzied market,” Lipof said. ”We’ve seen what happens when they do. People in 1987 purchased at the top of the market, and they couldn’t sell for that same number again for seven to ten years. So we do not need to be pushing values. It benefits nobody.”
He said lenders want accurate appraisal values, but that number is a fast-moving target in a frenzied market like the one Boston experienced. If the appraisals turn out to be a little low, that helps reduce the risk for lenders and keeps some buyers from overpaying.
But does it cost sellers anything?
“The inference here is that the sellers left something on the table because of the time adjustments that the appraisers weren’t making or weren’t making enough,” Lipof said. “Historically, sellers have been getting a major premium over what the market would bear just six months prior. And so maybe they didn’t quite sell for as much as they wanted, but they still made a nice profit.”
“It’s very difficult for appraisers to get enough of the right data to make a perfectly accurate adjustment, and we do our best,” he said. “But if you’ve got an increasing market, we’re always going to be lagging a little behind, and the reason why we were off so much during the pandemic is because we’ve never had prices rise that fast.”
How it affected the market
David “Laz” Lazowski is president of retail sales east for Fairway
Independent Mortgage. He said low appraisals simply weren’t a significant issue for his clients during those years.
“People have larger down payments in this market,” he said. “Some people had escalation clauses in their offer that say, ‘We’ll pay $25,000 over the actual appraisal.’ If the appraisal came in low, people just needed to increase their down payment. And there were deals that weren’t subject to the appraisal. Low appraisals had no practical effect on the market.”
Dave Twombly, an exclusive buyer’s agent at 4Buyers Real Estate in Cambridge, said 2021 was his 10th year in the real estate business and he had four low appraisals in the early spring, when the market was particularly frothy.
“In the previous nine years, I’d only had one low appraisal,” Twombly said.
In one case, the buyer planned to make a 25 percent down payment, which covered the difference between the purchase price and the appraisal, so it wasn’t an issue. Another buyer planned on a 45 percent down payment, which more than covered the difference. But in one case, the low appraisal actually benefited the buyer.
“One case I had, my buyers were putting down five percent,” he said. “They got a low appraisal, and they couldn’t come up with the difference. The only way that we were able to salvage the deal was because the sellers were buying a single-family somewhere else and their purchase was conditional on the sale of this property. So, we basically got them to lower the price to what the appraisal price was, saving the buyer $15,000.”
Peggy Pratt is a real estate agent with Century 21 in Revere. She’s been both a landlord and a real estate agent in the area for 27 years.
“In 2022, I had a client buying a three-family in Lynn, and I felt very confident that the appraisal would come in, but it was a little low,” she said. “It was only $5,000 more that they had to put down, and they were extremely happy. Now they have built up a lot of equity in that property, and I have them under agreement on a two-family.”
More often than not, she said, low appraisals don’t derail home purchases in this market.
“We always figure it out. Usually, the seller comes down $10,000 or $15,000 or whatever it is, because otherwise we put the house back on the market and wait another 45 to 60 days. And when something goes back on the market, you never have that same attraction. People wonder what’s wrong with it. So they’re going to come in lower anyway.
“We tell sellers if the buyer is still interested and invested, ‘We’re close to the end of the process.’ And we make it happen.”
Globe correspondent Jim Morrison can be reached at JamesAndrewMorrison@gmail.com. Follow him on X @jimmorrison617 and Address @GlobeHomes.