Homebuyers are facing bidding wars that could drive sale prices higher than appraised values. | File Photo

Low inventory has caused home prices to rise and forced prospective homebuyers into bidding wars, which in some cases has produced another side effect: appraisals that come in lower the contracted sales price, according to Allison Bartholomew, president of the Greater Louisville Association of Realtors.

“The prices have increased so much and so quickly that the appraisers are having a hard time justifying the sale prices,” Bartholomew said. “It’s not that the houses aren’t worth it,” but it does create a problem for homebuyers.

Banks typically lend homebuyers a percentage of the appraised value of a home. So if a homebuyer agrees to pay $300,000 for a house, but it is appraised for $275,000, then the homebuyer’s options are to come up with cash to pay the difference, renegotiate the sale price, make a compelling case for why the appraiser’s valuation is wrong, or walk away.

“It’s sort of a conundrum,” Bartholomew said.

On a single day this year, she said, 38 houses that had been pending came back on the market.

While some of those were likely a result of a bad inspection or the inability to negotiate repairs, Bartholomew said she “can only assume the majority” were appraisals coming in too low.

She personally has had two clients this year say their appraisal was lower than the agreed upon sale price, she said. Fortunately, she added, they were able to work it out in both instances.

Allison Bartholomew | Courtesy of Realtor.com

“The buyers are willing to pay this price, so it’s unfortunate,” Bartholomew said.

Dawn Self, senior loan adviser at First Rate Mortgage, said roughly one in every 20 home appraisals that come across her desk are lower than the contracted sales price.

“I don’t really see this being an issue, but it’s just par for the course,” she said. “It’s just because we don’t have a lot of inventory right now. That is why new construction is doing so well.”

In some instances, it may be difficult for an appraiser to find comparable home values in a neighborhood. Two houses may be similar sizes and ages but one may have been completely renovated while the other is still a fixer upper. The appraisal may not take all the interior renovations into account.

Keith Lewis, an appraiser with Galloway Appraisal, said he personally hadn’t seen appraisals come in underneath the contracted price but noted that he factors in real estate market conditions such as limited housing supply when making value determinations.

Lewis said he has seen the average days on the market decline, with anything staying listed for more than 20 days becoming unusual. And while bidding wars are driving home prices higher, he said he isn’t concerned about the local market prices rising too fast.

“I don’t see it this time as I did back in 2008 — 10 percent, 15 percent increases,” Lewis said. “I don’t see it this time because I think the lending this time is much more stringent.”

As long as inventory remains low, Bartholomew said, many homebuyers will continue to face bidding wars, and some real estate agents have started warning clients off getting into prolonged bidding wars; otherwise, they may end up paying more for a house than it will be worth in a few years.

“I don’t see this ending anytime soon,” said Bartholomew, who’s been a real estate agent for 26 years. “It’s a real interesting market, unlike any I have ever seen.”

Home sales in the Louisville MLS are up slightly year-to-date, with 91 more homes selling in the first four months of 2017 compared to the same period in 2016. The average sale price year-to-date rose 8.68 percent, to $196,160, according to GLAR.

However, homes sales for the month of April alone were down 8.26 percent, or 93 houses, GLAR stated. The average sale price in April was $202,303, up 8.67 percent.

Housing inventory in the Louisville MLS in April dropped 20.3 percent.

GLAR’s Jefferson County-specific numbers | Courtesy of Greater Louisville Association of Realtors

Inventory will remain low until home builders can catch up with demand.

Pat Durham, executive vice president of the Building Industry Association of Greater Louisville, noted in a news release from GLAR that market conditions had improved, making custom homes a viable option for homebuyers again.

“Certain parts of the market are seeing an increase in properties built for the spec (ready built) market, and remodelers are experiencing backlogs in their business activities,” Durham said in the release.

Caitlin Bowling
Louisville native Caitlin Bowling has covered the local restaurant and retail scene since 2014. After graduating from the Ohio University’s E.W. Scripps School of Journalism, Caitlin got her start at a newspaper in the mountains of North Carolina where she won multiple state awards for her reporting. Since returning to Louisville, she’s written for Business First and Insider Louisville, winning awards for health and business reporting and becoming a go-to source for business news. In addition to restaurants and retail business, Caitlin covers real estate, economic development and tourism. Email Caitlin at [email protected]