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Real estate appraisals fall short of superheated prices, locking out buyers

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Three years ago, Miriam Levy (a pseudonym) made a life-changing decision. She and her family left Canada for Israel to make her new home in the northern city of Safed, her dream destination. The family rented at first, but began to consider buying a place of their own.

With cash in the bank from the sale of the Canadian house, Miriam and her husband were soon able to find new jobs in Israel and continue to save.

Last year, Levys felt ready to put down roots and wanted to put down roots in the old town of Safed, a vibrant center with a limited number of unique properties. After searching for a long time, they found one location, but when it came time to sign the contract, the seller suddenly disappeared.In his second location they found, there was an overcoming There were some legal issues we couldn’t do. The third place seller asked for an extra amount at the last minute and they walked away.

Then came the fourth property. It was smaller than they had hoped, but it came with land they could use to build an expansion on. They can use their savings as a down payment and take advantage of a 70% loan that can be financed from their earnings. However, the loan relied on valuations from independent valuations.

Gaps between asking price and value, as determined by appraisers, are not uncommon, especially in an overheated market where supply is scarce and demand surges. But in this case, the appraiser’s work was short of his NIS 1 million ($283,079), about $3,000 per square meter ($279 per square foot).

This size disparity sets off a red flag, meaning banks and other lenders are likely to reject property mortgages.The ratings gap is believed to be one of the reasons mortgage is declining last few months.

View of Safed Street at sunset. (His RnDmS via iStock by Getty Images)

This situation put Levys in a bind faced by many potential buyers looking for a home on the budget end. After raising a 25% down payment (the minimum required in most cases) and money to cover the purchase costs (brokerage fees, taxes, legal fees, moving costs), they decided to take out the rest of the mortgage. depends. We plan to pay 75% of the sale price of the property out of our monthly income on the mortgage over the next 20-30 years.

However, banks only lend against values ​​determined by appraisers. This takes into account the actual selling price, but puts more emphasis on specific factors such as material quality and building dimensions. A professional appraisal does not ignore “potential value,” but it does not price a property based on its future potential. The rapidly changing market is creating unique properties, making pricing even more difficult, creating gaps and acting as a serious deterrent for lenders and ultimately preventing potential buyers from buying a home. .

Almost 20% year-on-year as home prices are rising very quickly according to the latest report — Those with properties to sell are relying on high prices to anticipate where the market will head, assuming inflation continues to spike. The owner is willing to wait until a buyer arrives who is willing to pay the top shekel.

For buyers, paying extra at the point of sale is not necessarily a deterrent if they plan to stay in the property for some time. They believe that prices will catch up in a short period of time, and even if they want to sell the property, they can still make a sizable profit.

But for lenders, offering more than the property is truly valued for is a risky proposition. And if the gap is too large, it simply refuses to lend, at least at the level required by the borrower.

For the Levys, a NIS loan of $1 million below the asking price means they can’t buy a home unless they can finance the difference from another source. This is a difficult proposition. They are effectively blocked even though you have enough money to pay back each month. And as they continue to search for homes, prices continue to rise. This means that their down payment may soon not be enough to buy the kind of property they want.

job of appraiser

Becoming an appraiser is a huge accomplishment. Alongside a bachelor’s degree, studies in engineering, real estate law, taxation, finance, statistics, and valuation theory required him to conduct his program of rigorous training, including a year as an intern and, eventually, a national examination. I have.their work falls under Ministry of Justicethrough its Board of Real Estate Appraisers, has developed a detailed framework governing how real estate is valued for financing purposes (referred to as Standard 19).

Ran Neeman has over 25 years of experience in the industry and is considered a top expert in his field. In an interview with The Times of Israel, he said the job required a deep knowledge of the market.

“It’s very important to judge value based on what the market is saying. If you have a lot of similar properties, you can see recent deals of the same size in the same location. Each property is unique in some way: it may have ocean views, or more outdoor space, or it may be built with more expensive materials,” he explained.

Ran Neeman, Central Israel Real Estate Appraiser, October 2022 (Courtesy Ran Neeman)

Niemann also emphasizes that estimating “potential value” can be part of the job. “We need to consider the value of the land and the potential for improvement, but we also need to understand the certainty about it. options for the development of one of the government’s development plans [such as Pinui Binui or TAMA 38, or expanding the existing building]”

The property Levy was eyeing at Safed was truly unique, in a very limited market that didn’t change owners on a regular basis. Prices are soaring In the North, it is increasing at a rate of almost 3% per month.

The house had two bedrooms, a living room and a basement. However, the lot was quite large and allowed us to expand the living area. There is also the emotional side. “Old Town has a magical feel. You can’t put a price on it,” he says Levy.

Neeman, who was not involved in Safed’s valuation, recognizes the challenges in a highly competitive market where both sellers/owners and buyers have vested interests.

“We are under tremendous pressure from owners and buyers who need valuations for funding to value their properties at the highest possible price. want and the market is changing so fast that it can be very difficult,” he said.

There is an appraiser in the picture and “there is an inherent tension there.”

“Banks need accurate valuations to minimize lending risk. Owners want the best possible valuations and appraisers must perform professional duties.” ‘ he continued.

The tools used by appraisers are better than they used to be, but it’s still a ‘jungle’ for appraisers who need to ‘evaluate all available information that could affect the price’.

Safed, Old Town, November 2022 (Danielle Nagler)

Appraisers have access to an array of professional tools, the advertised price of a property and the price paid are just some of them. Buyers and sellers only see the asking price of a home. In a rapidly changing market, this information does not always give true insight into what is being paid.

“Buyers and sellers look at the prices advertised on places like Yad2 and consider these prices to be ‘fair prices’. And it is impossible and wrong to put value on personal factors. “

“Appraisers have to be objective,” he said. This means sticking to the value of the property being appraised, with a realistic view of its potential and the amount of things that are certain enough to be included in the appraisal.

This process can be tedious. Each appraiser covers a specific region of the country with deep expertise in a particular market. They acknowledge advertised home prices but work with realtors to gather information about how much homes in a particular area are actually selling for at the time. Examining the definitions and permissions granted to them, their work is detailed and extensive.

“Usually it takes five to seven days to create an assessment,” says Neeman. “Reports are typically 15 to 30 pages long.”

What can the gap tell us?

The Levys experience is not unique, but the value gap in their case is huge. In real estate-focused discussion forums, the appraiser’s role can be contentious, with buyers saying the gap between the asking price and the appraiser’s values ​​is becoming increasingly common. One anonymous homebuyer described his experience facing a problematically large gap, and an appraiser offered to do more work for an additional fee, with the promise that this could change the value. I got

But Neiman says appraisers rarely miss anything, so if the final numbers aren’t what they wanted, they’re under pressure to “change their minds” in favor of the buyer or seller. I argue that we must resist.

Safed and Surroundings, November 2022 (Danielle Nagler)

“Appraisers should be open to re-evaluating prices only if circumstances change and there is new evidence that was not initially available,” he said.

For Safed’s Levy family, comparability difficulties and market price pressures are evident.

The property tax database that records the actual purchase price incorporates a time lag, and since early July, only one property in Safed has changed owners. The property was his 270 square meters (2,906 square feet) with a total area of ​​850 square meters (9,149 square feet), a five-bedroom home built in 2010. The house was on the outskirts of the city and cost NIS 3.7 million ($1,047,393). It’s much larger and in a very different part of town than the property the Levi family was looking for.

A quick scan of Yad2 in Safed’s Old Town yields two properties: 3 bedroom housepriced at NIS 4.4 million ($1,245,549), with a 118-square-meter (1,270-square-foot) residence and a 40-square-meter garden, 8 bedroom property It is spread over three floors of 260 square meters (2,799 square feet) and has a garden of 50 square meters (538 square feet). The asking price is NIS 5.9 million ($1,670,167). These figures suggest his NIS 4 million is high for a property of the size the tax collector is considering. In other words, the appraiser is almost certainly correct in estimating the value of the property.

She and her husband don’t have enough money to put more money into the estate, but Levi doesn’t want to leave. They need that mortgage. Miriam hopes the additional legal documents will bring added value. And since this is her family’s potential “forever home,” she’s confident that even if she pays a little more, it’s still worth it.

However, if valuations and prices remain so far apart, this is another potential buy away from market pressure and further evidence of difficulties in a tightening market.

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