Colorado’s hot real estate market has put some buyers in the prickly position of having to decide just how much they’re willing to pay for a property — even if it means paying more than it’s currently worth.
Bidding wars not seen here since the turn of the millennium are slamming into once-sluggish sales that depressed prices long enough that current appraisals sometimes can’t catch up.
That leaves some wondering whether a new mini-bubble is inadvertently being created, putting extra pressure on appraisers who’ve already been beaten down with part of the blame for the prior housing bubble.
“If buyers are overzealous in purchasing, it’s very quickly an issue,” said Lisa Hier, owner of Hier Appraisals in Castle Rock. “We don’t want to re-create another bubble. I don’t want to blow up a purchase, but if you’re talking about a $25,000 difference, that’s huge and something’s off.”
And it’s happening. The timing of cheap mortgages, coupled with a slim inventory that can’t meet demand, has created even more of a seller’s market, since many homes have three or more bids to choose from.
Homes priced from $200,000 to $350,000 are the hottest on the market, according to several real estate experts, often drawing multiple offers within 24 hours of listing — most over the asking price.
If a seller can’t close on the first offer, the next one is likely at or near the offer price of the first, putting even more pressure on the buyer with the highest bid.
Some buyers who have worked hard to find and land a house are surprised to find that their offer is higher than the amount at which the property appraises — sometimes by thousands of dollars.
When that happens, formulas used by a bank or mortgage broker to determine down payments are skewed, leaving would-be homeowners on the hook for more money at the table than some can afford.
Real estate agents, bankers, mortgage brokers and appraisers each have a tale or two of a client who had to either walk away from a deal or come up with the extra cash.
One of them was Jeremy Brown, a construction-management consultant who bumped into a bidding war when he looked to buy in Denver this year.
The house he eventually purchased with his fiancée in the city’s Baker neighborhood appraised at $10,000 lower than the couple’s offer. It wasn’t the first time he had bumped into an appraisal coming in lower than his offer. It happened a year ago in Virginia, where he moved from.
“Either you bring more cash to the table, which is what the seller tried to get us to do, or you renegotiate the sale price,” said Brown, 32. “Having to bring more cash to the deal can be a big shock. Had it not happened once before, I’d have been reluctant to draw a hard line.”
In the end, Brown still had to come up with half the difference.
The reason is that a bank loan is reliant on the appraisal. (Cash buyers don’t run into the same problem since an appraisal isn’t needed unless they ask for one.)
Conventional loans rely on a down payment of 20 percent and a loan value based on the appraisal. So a $200,000 offer would require a $40,000 down payment. But if the appraisal is under the offered amount — say, $180,000 in this example — then down payments and numbers are derived from that point.
The buyer would have to come up with the $20,000 difference between the offer and the appraisal, on top of the 20 percent.
Thus, the $180,000 appraisal lowers the 20 percent to $36,000, and the loan covers the remaining $144,000. But the difference between appraisal and offer ($20,000) is the buyer’s obligation and is added to the 20 percent ($36,000), resulting in an initial cash outlay of $56,000.
“Buyers have a couple of options,” said Craig Wildrick at Zions Bancorp, which owns Vectra Bank. “They can increase their down payment, reducing the amount of the loan, negotiate a lower price … or decide to look for a different property.”
That becomes even harder for a buyer relying on a Federal Housing Administration loan, where a 3.5 percent down payment could reflect the limits of a savings account.
There was little concern 10 years ago and a strong belief that real estate values would always increase. Then the bubble burst and market values collapsed.
Though the market rebounds, the scars remain.
“Lenders are very nervous right now. It’s very difficult,” said appraiser Jo Stinett of Peak View Real Estate Appraisals. “And even if the appraiser is able to show the market is strengthening and that values are increasing, some underwriters simply won’t take it.”
She added: “The market is almost working against itself, and we have to be really, really careful that we don’t create another bubble.”
Colorado and its Front Range are part of a multistate area where the Federal Reserve Bank on June 5 said the phenomenon is happening.
Banks reported that “low inventories have slowed sales and put upward pressure on prices in some areas,” giving concern “that appraisals were not keeping pace with price increases,” the Federal Reserve said in its commentary on current economic conditions, commonly called the Beige Book.
Bidding wars have sometimes forced buyers to be more competitive than they should be, some Realtors say.
“One seller had a buyer who literally wrote an escalation clause into their offer, beating any other offer up to $30,000 over the list price,” said Jolon Ruch, president-elect of the Colorado Association of Realtors and a Realtor with Keller Williams Preferred Realty in Westminster.
“Sometimes it’s just about the win, about the competition, and that’s not very responsible,” she said.
And there are buyers who have simply had enough and are “desperate to obtain a house,” said Lisa Desmarais, an appraiser at Peak to Peak Appraising in Broomfield.
“One buyer had been through losing three other homes due to being outbid and opted to bid above market just to avoid any more emotional turmoil,” Desmarais said.
For the challenged appraiser, it’s simply a matter of doing the job well.
“Our job is not to justify the ‘winning bid’ of a specific buyer, who may not be acting in their own best interest,” Desmarais said, “but to determine what the typical buyer would pay based on current market conditions.”
For homebuyer Brown, the solution is simple: “Don’t be too emotionally attached. People’s excitement and a low inventory can make things crazy.”
David Migoya: 303-954-1506, firstname.lastname@example.org or twitter.com/davidmigoya