Are Tighter Appraisals Hurting Hawaii Home Sales?

As the market tightens here in Kona with more sales and fewer new homes being put up for sale, appraisals are becoming the leading threat to home sales.

The question I have  is, “Is that a good thing or a bad thing?”

When representing a seller, I am less worried about the buyer qualifying for a loan than I was a few months back. That situation has improved greatly. I now worry about the appraisal. Appraisers are much more conservative, with good reason, than they were a few years back. There are also a host of new laws that regulate their profession. That is all a very good thing.

Home sales in the last 90 days, regardless of condition, kitchen and bath upgrades, and even view are the standard for determining value. In other words, a dumpy home that is foreclosed upon and then sells for a rock bottom price affects all homes in a neighborhood.

If an appraisal comes in for less than the sales price, then the seller has to accept the new price, or the buyer must come up with the difference in cash, or they meet somewhere in the middle. For the buyer, this can often mean getting a home for even less. On the surface, this seems like a great situation, but in this new tight market, it can mean not getting the home or even finding a home at all on which to make an offer.

The impact of tightening appraisals is now being felt in the REO/Bank-owned foreclosure market. Banks are starting to include a clause in the Purchase Contract whereby the buyer agrees that the sale is “not subject to an appraisal,” and that they will cover any difference with cash. In essence, a buyer must risk their deposit or have a pocketful of cash in order to make an offer. Certainly not the best situation for most buyers, and one I strongly advise them not to agree to either.

After the past few years of seeing people lose their homes, I think the tighter appraisals are a good thing. Without them, we would likely be experiencing a mini bubble here in Kona. As a homeowner, I’d of course love that, but I think we all still need a little more time to catch our breath.  We have seen that a bubble hurts everyone, not just the buyer who paid too much.

So what do you think? On the whole, are tighter appraisals a good or bad thing? I’d love to hear what you have to say about it.