It is no secret that in many areas of the country, real estate values are going down. And when real estate values go down in a particular area, the area can be labeled a “declining market” by Fannie Mae / Freddie Mac and it will impact your ability to finance a property in these areas.
Declining Markets: Appraisal Reports
When an appraiser prepares an appraisal for a property that is in a declining market, oversupply and marketing tme are two things to consider. A standard appraisal for a declining market may note a six month (or more) marketing time and should detail neighborhood marketing data for any changes in the market for both the most recent quarter and preceding quarter. The data for these periods should include (at a minimum):
- Number of listings
- Average marketing time
- Sale to list price ratio
- The appearance or absence of seller concessions
Declining Markets: Comparable Properties For Sale
Regardless if an appraisal report is for a property in a declining market or not, the appraiser will notate the “comps” which is short for “comparables” or “comparable properties for sale” in the appraisal. The comparable sales section of the appraisal must include:
- Two sales must be within a three month period
- Two listings with list to sales ratios and supporting value
- If comparable sales within a three month period are not available the appraiser must provide an acceptable narrative to explain the considerations for negative time adjustment. The rate of adjustment and the source of the marketing trend data must both be cited, or
- An explanation with reference to the supporting data, why such time adjustments would not be applicable.
If the property on the appraisal is a new build and is being sold by the builder, then two comparable sales from outside the subdivision will most likely be required by the lender.
When purchasing a property in a declining market, be sure to speak with your loan officer about lending guidelines that are different than for properties that are not deemed in a “declining market” area and also be sure to cover the appraisal differences that will be required.
When it comes to the impact on the loan process, if a property is in a declining market — there are all that many more things that you need to be aware of and your loan officer will be your best friend at helping you get financing even though property values are going down in the area where you are buying.
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