The end of the summer in Chicago has been a mixed bag. While many would-be purchasers are sitting on the sidelines, waiting to see a bottom, others see opportunity. As Chicago agent Greg Whelan notes: “Investors are purchasing one property after another.”
Inventory Languishing Through Summer
Regardless of motive, most buyers have the same desires; good homes, in good locations, at great prices. Since few homes fit all three criteria, when one of these rarities comes on the market, it normally garners multiple offers. Meanwhile, most inventory languishes.
Low Appraisals Hamper Sales
In recent months, Chicago Redfin agents have noticed a trend regarding low appraisals. More and more deals haven’t been “appraising out” and when this occurs, the buyers and sellers are forced into an awkward position.
Appraisals are an important piece of the financing process, as lenders must cap their mortgages based on the value established by the appraiser. Although the buyer is often protected with an appraisal contingency (the appraised value must equal at least the agreed-upon purchase price,) many buyers negotiate with the seller to keep the deal together. This often means a concession by both parties.
Jim Carollo, a northwest suburban Chicago agent, has had two deals fail to appraise out this summer. In one case, the property appraised for $110,000 below the agreed-upon price (or about 10% off.) The seller dropped his price to save the transaction so our buyer came out well in this circumstance.
Several other Redfin agents have similar stories to tell, although in some instances, the outcomes weren’t as positive. At this stage of the transaction, a buyer has normally already paid for an inspection, appraisal, and an attorney so it can be painful to start all over, especially if it’s his or her dream home. Interestingly, some buyers view the appraisal process as a safety net that prevents overpaying for a property.
Why are so many properties not appraising out? Most observers agree that the lending standards pendulum has swung too far in the restrictive direction. Before the real estate crash, many appraisers were considered too soft and could be relied upon to bring in high appraisals, right where the developers, realtors and lenders wanted them. These ambitious appraisals played a big part in helping create the housing bubble.
In 2009, Freddie Mac, Fannie Mae, and FHA banned realtors and lenders from selecting the appraisers on deals, hoping to limit conflicts of interest created through existing relationships. AMCs (Appraisal Management Companies) sprang up to be intermediaries between the appraisers and lenders (the ones who order the appraisals today.) This so called “appraiser independence” has brought many positives, especially increased confidence in the appraisal process. It has also introduced some challenges. Many believe these low appraisals come from inexperienced appraisers working in unfamiliar neighborhoods.
Greg describes some of the inconsistencies he’s seen: “In one deal the appraiser used a sold property in Belmont Cragin (on Central) for a home in Logan Square (east of Kedzie). In another Lincoln Park deal, the appraiser compared our extra wide small lot home (36’ X 68’) in Racine to a narrow (19’ wide) attached rowhome located one block west of Ashland.”
In both cases, the parties in the deal agreed that the appraiser was off base and they were able to challenge the appraisal. This seems to happen less frequently lately, but it still happens.
Pricing For Today’s Market
Patrick Lusk, a Western Suburban Redfin agent, observes that: “Many potential buyers are looking at the last sale price as a main pricing evaluation tool, regardless of the situation surrounding the previous transaction, or the history of upgrades since. As a result, many sellers (and buyers) are missing out on quality opportunities.”
The takeaway? Base your offer strategy on the home’s condition and value in today’s market.
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