Catherine Reagor
The Arizona Republic

Metropolitan Phoenix’s runaway home prices are speeding ahead of appraisals, forcing some buyers to bridge the gap with cash or to walk away from the deal.

The gap is between the asking or contract price on houses and the appraised value of the homes.

Housing prices in some neighborhoods have been jumping as much as 10 percent a month this year, but not all appraisal reports are showing the same gains.

These gaps between sales prices and appraisals are causing a growing number of home sales to fall through.

Most lenders will not finance anything above the amount of the home’s appraisal. Buyers often don’t have the extra funds, and others are concerned that they then could be paying too much for their new home.

“Sellers are getting greedy, and buyers are getting desperate,” said Jay Butler, director of the Arizona Real Estate Center at Arizona State University’s Polytechnic campus. “If too many Valley homes aren’t appraising for their sales prices, it’s a sign the housing market is out of whack.”

As a result, more sellers are listing homes with “not subject to appraisal” clauses. Buyers must then come up with cash to close the deal, even if the house isn’t appraised at the asking price.

This gap between asking prices for homes and appraisals is starting to cause conflicts.

Some appraisers are feeling pressure to make deals work, but inflated appraisals also cause real problems for homeowners. If prices fall or even flatten out in some areas, a homeowner could be left upside down in their house - that is, owing more than the home is worth.

Recently at a party, Butler said a real estate agent told him about nine deals he had lost because the appraisals didn’t come in high enough.

“Appraisers are really caught between rock and hard place,” he said. “If they don’t do what lenders want, then they are out of a job.”

A basic definition of an appraiser’s job is to provide an independent value of a property based on market conditions and the condition of the home, but market watchers say appraisers value houses differently.

Some look at comparable sales for a small area around the home or the subdivision it is in. Others look much farther out than a home’s neighborhood to find similar sales. Some appraisers use listings, instead of just closed sales, to determine prices. And appraisers weigh overall market conditions differently.

“Appraisers are always looking in the past, and whether it’s a rapidly appreciating housing market or one that is in recession that’s a problem,” said Thomas Heineman, an appraiser and chairman of the Arizona Board of Appraisal, which regulates the industry. “There’s always pressure to make the numbers work.”

More than half of U.S. appraisers say they have felt pressure to overstate the value or condition of a property, according to a survey released last year by October Research Corp.

Inflated prices could also feed more investor speculation in the Valley’s housing market.

Gaps between sales prices and appraisals can be found in most of the nation’s high-appreciation housing markets from the East Coast to California. The problem is newer to metro Phoenix, where double-digit monthly jumps in home prices only started late last year.

Busy times for appraisers

Besides trying to stay ahead of price increases, metro Phoenix appraisers are struggling to stay ahead of the growing workload from record home deals. New and used home sales are up 25 percent so far this year from 2004’s record pace.

Unlike real estate agents or many lenders who work on commission, appraisers are paid flat fees of $300 to $400 per job. Appraisers have nothing to gain by raising or lowering a valuation, except future business with the real estate agent or lender. In a hot market like this, appraisers feel the pressure to do more appraisals to make more money.

The appraisal industry hasn’t attracted as many new members as other parts of the real estate market. The number of Arizona real estate agents has climbed almost 50 percent since 2000. In the past five years, the number of appraisers is up only 41 percent, according to the Arizona Board of Appraisal, which regulates appraisers.

There are now about 2,400 licensed Arizona appraisers, and 72,000 real estate agents.

Appraisers’ workload isn’t limited to sales; they also do values for refinancing.

Unhappy buyers

Home buyers or sellers unhappy with their appraisals can ask for a copy from the lender. If they have complaints, they can contact the Arizona Board of Appraisal.

The appraisal on Lorie Parch’s home came in too little and almost too late. The freelance writer wanted to sell her home in the southeast Valley’s Gold Canyon area and move to south Scottsdale.

In May, she found a house listed for $298,000 in Scottsdale and made a full-price offer. Her offer was accepted, and Parch found buyers for her Gold Canyon home.

But by late May, the appraisal on the four-bedroom, south Scottsdale home still hadn’t been done. Her lender assured her it wouldn’t be a problem, but her real estate agent was afraid it would slow her closing. And she had to be out of her Gold Canyon house in early June.

The appraisal on the south Scottsdale home was finally done, but it came in $13,000 under the asking price.

“I was freaking out. I was already putting $20,000 down on the house. The sellers wouldn’t budge because all the comps for the area showed the house was worth $298,000,” Parch said. “The appraisal was late, and the appraiser wouldn’t adjust it despite all the evidence of other comparable sales in the area.”

If Parch walked away from the house, she would lose her $3,000 earnest deposit and have nowhere to live because buyers of her Gold Canyon home were scheduled to move in the next week. Plus, home prices in the south Scottsdale neighborhood had already climbed an additional 5 percent so she would have to pay more for another house.

“Phoenix home sales are setting records. How is everyone else’s home appraising?” said Parch, who ended up paying the extra money to bridge the gap between the appraisal and sales price.

“Something is wrong with the appraisal-lender process.”

Federal reform

Nationally, the hot housing market and the potential for inflated appraisals has caught the attention of federal regulators.

To reduce any conflict of interest, the Office of the Comptroller of the Currency is requiring banks to prohibit loan officers from picking appraisers. Congress is looking at mortgage reform legislation that would ban lender interference or influence over appraisals.

Appraisers have testified to threats from loan officers and mortgage brokers saying they won’t pay for the appraisal or won’t give them more work if the value of a home doesn’t “hit the number” that they need to make the deal.

Wayne Romain of the Appraisal Firm, based in Phoenix, said appraisers are getting the blame for high housing values, but everyone in the home-buying process is part of the problem.

“Appraisers are pressured by the home buyers, the sellers, the lenders and the real estate agents,” he said. “Now home buyers are paying well over appraised value, acting out of passion or desperation, not need. Home sellers think their homes are worth more than they are.”

He said real estate agents often avoid disclosure on houses’ problems, and mortgage lenders shop appraisers for values that make a deal work.

Catching up to market

Inflated appraisals aren’t a big problem for the Valley’s housing market yet because home prices continue to climb. But the monthly increases are beginning to slow, signaling that the real estate market’s biggest price run-ups may be behind it for now.

Those who purchased houses at the top of the market bear the most risk, particularly if they had to put more down because an appraisal didn’t come in high enough.

Investors buying high and counting on appreciation to catch up could end up selling for a loss. Lenders financing properties with inflated appraisals could lose money.

“Too many peoples’ expectations are too high for the Valley’s housing market,” said John Foltz, president of Realty Executives.

“When it slows, appraisers will be able to catch up and so will the rest of the market.”