Appraisal. The word alone is enough to send shivers up the spines of Real Estate agents, mortgage brokers, home buyers & sellers alike. If you haven’t heard of the recent difficulties in this murky aspect of a home purchase, you just haven’t been paying attention. Hands tied by draconian new(er) regulations, appraisers have a thankless job. Blindly drawn to appraise neighborhoods they may not be familiar with, forced to attribute arbitrary “declining market” markers to a subject property’s value, enrolled into witness protection while the report is being prepared so as not to be unduly influenced by germane information that an agent may be able to provide … the whole endeavor is nothing short of a hot mess at present.
Case in point: on a quarter of a million dollar home sale, I recently experienced the unique phenomenon of an appraisal coming in $500 short of the purchase price. That’s right, boys and girls, this particular appraiser was so astute that he was able to tell a willing buyer and seller that they missed market value by approximately 0.2%. This despite the fact that he jumped subdivisions to find lesser comps than those within the target neighborhood of similar size, age and sale dates. Who knew a third party evaluation could spot a missed market value by such an incidental amount? Ring the bell and give that man a stuffed animal! We’ve got ourselves a bulls-eye!
This was simply the latest in a string of dubious evaluations. $3000 short here, $1500 there, it’s getting to be a common occurrence for an appraisal in 2010 to come in just shy of the purchase price. I don't necessarily fault the appraisers per se, but the underlying forces which stir this cauldron of idiocy. It's almost as though there were some unspoken mandate from the banks themselves to artificially cram down values.
Hmm ….
Considering there is also a rash of appraisals getting reviewed and rejected at underwriting by a bean counter in a bunker who considers himself a higher authority on property value than the professional whom the buyer just paid $300-400 for an independent evaluation (I recently had an underwriter downgrade a purchase price appraised value by $5000 for no discernible reason), it begs the question:
Are banks attempting to minimize their exposure by willfully renegotiating deals?
Less a hysterical conspiracy theorist than a cranky agent who scrutinizes value to death before moving forward with my clients, it makes one wonder. Especially when said agent typically goes years at a time without running into an appraisal issue (due to preventative due diligence), only to sprint headlong into four successive minutely low evaluations.
A bank shaves off their exposure a little here, a little there …
Appraisers know that in addition to the absurd rolls of red tape they must claw through on each file, they have overzealous underwriters scrutinizing each report like it’s a chain letter from Ted Kaczynski. Hard not to surmise that many appraisers aren’t demonstrating their thoroughness (and preventing underwriter demands to change the comps used, market factor variables, etc) by bringing in their evaluations just shy of purchase price intentionally. Whereas in the past the sales price was widely considered the first and best comp as it demonstrates the most current meeting of the minds between a willing buyer and seller in the open market, I’d hazard that it is now treated as a numerical limbo stick. Get that creaky evaluative body just underneath the bar, no matter how much contortion is needed to get there, and you are through to the next round. Bump your belly against the sales price, however, and you are likely back in line to try again - if not booted out of the rotation altogether.
This is becoming a very considerable problem for those seeking closing cost assistance.
With my listings, I am much more cautious now when entertaining offers which include a seller concession. Given the dearth of down payment options between 3.5% (FHA) and 20% (conventional), it poses some difficulty. Many buyers, especially first timers, are a bit cash-strapped in today’s economy. While scraping up enough for the down payment and seeking a seller concession towards costs has been the play for the past couple of years, I am becoming much more leery of that tactic with each successive appraisal shortfall. You ride the horse you have, but given the choice of two scenarios, I will recommend my sellers work with an offer with a lower price and no concession versus a higher price with seller concession every day of the week. Taking more risk out of the transaction, it might even be worth paying the insurance of a lesser net. You don't make any more money if the deal explodes on the way to the closing table.
While we agents often think of appraisal difficulties from the listing side of the table, forgive me a brief patting on the back before I flip the script. Making myself the point of contact for access to my listings, I meet appraisers with an informational packet the size of the pending health care legislation. My properties are not an easy mark for downgrading, and I haven‘t lost an appraisal on that side of the table for quite some time. Where I have encountered difficulties are with my buyers on properties in which the listing agents never inserted themselves into the process. No comps provided, no list of upgrades, nada. A low appraisal sounds great in theory for the buyer, but that is not always the case. While rubbing our hands together in anticipation of the price reduction we are going to force out of the seller, many equity-starved sellers in our market are simply not in a position to eat the loss by adjusting the purchase price to meet the appraised value. Negotiations begin anew, and the buyer often has to bring in additional monies to salvage the sale. Additional monies they may not have, or have earmarked for a refrigerator.
How odd to represent your buyer’s interests by disputing a low appraisal. In a case where a seller is unwilling or unable to reduce the sales price to the appraised value, it is just one of the strange bedfellows that occasion the slumber party hosted by the new rules of Real Estate. Should this trend continue in which I find listing agents not doing their parts to demonstrate the property’s value, it might behoove me, as the buyer’s agent, to take over this responsibility. Sounds contrary to the interests of the buyer at first blush, but if we are confident that the value is there and can ill afford to bring in any additional cash to closing, it just might be my fiduciary obligation to ensure that a bogus appraisal and/or underwriter review does not derail my client’s dream of home ownership.
Mama told me there would be days like these, but she forgot to pack my Thomas the Train pajamas.
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I make sure to insert myself in the appraisal process, especially when the appraiser is from out of town. No matter how objective an appraisal tries to be, value always has a subjective side.
An in town appraiser can qualitatively "know the value", then use comps to back it up quantitatively to a "T".
If they are from out of town, they have to figure out why there is such a discrepancy in comps and often cannot reconcile this without "inside information" from the locals.
I always wonder why the appraiser should even know the "contract price" if their data is truly 100% objective! They should appraise based on market data and knowledge...not trying to support a price or discredit a price.
I am right there comps in hand ready for an appraiser and ready to jump in with info as and where needed - which can be frustrating. it can and is sooooo aggravating that they can get to within $1000 or $500 as you said of a purchase price. I am extremely frustated with the "spin the bottle" appraisal process that seems to be happening.
I agree as to the risk factor too with you on the concessions in an offer - that $5000 needed for closing costs could throw the whole deal out the window right in the middle......
Out of area appraisers - if they have to call me because they do not know the area and cannot do the job correctly because of , why are they getting top dollar for their services and I am doing the work?
Glad to see you survived and maybe even had a great time with the family at Disney. Ok, my sweetness just ran out.
I saw this mentioned on facebook and though I agree with the majority of your assessment here.I have to say you are being far to easy on the appraisers. My experience has shown that part of this new(er) process has been to allow sub standard practitioners back into the mix and the result has been a dumbing down within the herd so to speak. I have personally witnessed appraisers who only had experience in cookie cutter subdivisions being completely lost in an older upscale part of town where they could not find a comp with both hands and a search light. And even worse having little experience to make apples to apples assessments in other areas (and certainly price ranges) where it required more than a simple knowledge of a couple dozen floor plans and a vague ability to match the sq. footage. Oh...and throw in a little ego action and it gets messier. Yeah...getting burned makes me a bit more cynical than usual but really, compared to your current circumstances I am living it up so I don't know why I am complaining...oh yeah, I remember, inept appraisers!
Keep up the good work my friend, I am amazed that you have maintained such a good attitude too!
Oh Paul, I have a doozy going on right now. I'm contesting a high appraisal. It'lll make a great blog in a bit...
A high appraisal ... that's like catching sight of a leprechaun riding a unicorn across a caramel sky. Take a picture of the evaluation or nobody will believe you.
Melina, are you repping the buyer or seller with the high appraisal?
I hear you all!!!! I'm an appraiser, (and a real estate broker) experienced by 10+ years of appraising, and being in real estate a few years prior. I am being overlooked by the multitudes of orders (yeah RIGHT, where the heck are they). Anyway, it used to be a great business to be in. Yes, there was pressure to get a higher price in the old days. but once i argued my point, they left me alone. Now the pressure is to use lesser comps, bank sales, short sales. It's total reverse and far more pressure than I ever experienced before HVCC. I know my market (MD. VA and DC) and have appraisers on staff that know additional markets that I don't. Since HVCC my orders went from 30 to 40 a month to 3 to 6 a month. Wainting on an appraisal order is like the line of taxies at the airport, you don't know WHO you will get. Or how experienced they are. Of course, I know appraisers who have been around forever and still don't have a clue. Time in the business does not mean they are good at it, just like any profession.
Back when times were good, I anticipated good realtors to leave or provide some information, most I had already gathered, but it supported my choices. It was acceptable and no pressure wasd there, ever. If something was there I missed, I gave it consideration. I often do a "map search" to choose my comps, if the listing has a wrong map placement, I might miss something. OH, or if the realtor called a split foyer a colonial, and I was searching for split foyers, I sometimes missed that sale too. I had to learn to NOT pick a style, since there is not many classes to help either party to determine style. Even home owners argue with the facts, split foyer, split level, i gave up, nod as they tell me how their house is exactly like the one across the street. (NOT) and just do it right anyway.
Sometimes bank sales ARE the market if that is all that has closed, we are under many guidelines and have to fit the "brackets" of age and size, comps under 90 days, etc. One must be at a negative adjustment and one at a positive, etc, etc. But as it goes, its an opinion, so the underwriter, reviewer then demands adjustments to listings... (NOT IF THE REALTOR HAS ALREADY ADJUSTED WITHIN LAST 60 DAYS) we can argue with them, but then "somehow" get removed form rotation, imagine that. Who is controlling this mess? the banks, and look haw they screwed up things already. I only pray this will somehoiw thurn out to be something better in the future. I just havn't figured out how yet!
Gee play by their rules are get off the rotation, now that is something to consider, must be why I have had to move in with family. I can no longer support my self. NO work, no money. And I am very good at what I do, so its not due to lack of knowledge. I actually am an approved instructor. I must know "something". Anyway, its a long haul for us all, so buckle up, enjoy th eride, and prepare for a rough landing (sonmetime in the next 10 years)
Oh Paul, this was so well written and very informative. Thanks for taking the time to craft a thoughful and entertaining blog.
Paul, this is a fabulous blog! Thanks so much for sharing with us!!
-Karin
Hits home for me today - just heard that an appraisal on one of my short-sale listings was really "jerry-rigged" to hit the exact number on the sales contract. Never mind that the adjustments made to get there were ridden with errors and crazy assumptions not supported by the market.
IMHO - appraisers should NOT have access to the sales contract before submitting their report. Then we could really see clean research. And not just a number.
I find it amazing myself that the same Major Lenders (with the initials: WM, BOA, JP M C, etc) will have a review downgraded appraisal on their competitor's short sale and visa versa.
Its almost like living on the other side of the mirror...only more so!
However, there is a lot to be said for a LARGE downpayment (30% or more) in avoiding that $1,500 down appraisal.
I think the banks have gotten the message...no more bail outs...so now, they're watching their exposure...for this year...2011 who knows? Heck, the world ends 12/21/2012, right?
Paul,
Because of a similar appraisal I did about 8 months ago, your story regarding the appraisal that came in $500 less than the sales price made me laugh.
The home was a nice one story in a nice area. The sales price was $339,500. After gridding 4 good sales, a pending sale and a listing, my opinion of value was $338k to $342K. Like most appraisers, I know I am not astute enough to assign value to the nearest $500; I valued it at $340,000, signed the report and figured I was done with that assignment.
Boy was I wrong. After 11 phone calls (4 from AMC: 1 each from customer service rep, non-appraiser reviewer, head reviewer & Appraisal/Vendor control agent), (3 from lender; processor, underwriter & review appraiser), (2 from each agent wanting to know what the problem was with my appraisal and why I was killing there deal), 9 emails (similar mix), 3 rejections of my report, 2 ½ hours additional time and a one-page addendum explaining how I could value a property above the sales price. They finally accepted my report and value of $340,000.
Since that time I have had two other similar assignments. And while it may drive the agents crazy, in both cases I have turned in my report $500 less than sales price.
As a post script, before that assignment I was doing 4-6 appraisals a month for that AMC. Since then, not a single appraisal.
Very pleased to see some appraiser response on this post. Essentially confirms my suspicions. Either play ball and downgrade the value to appease (or prevent scrutiny from) the bank or kiss that particular business pipeline goodbye. These new regulations were supposedly for the benefit of the consumer (prevent artificial price spikes and subsequent crashes), but really, we are more at the mercy of our financial stewards than ever. The "artificial" moniker can now be hung on the other side of the equation. Willing consumers are being denied opportunity and impacted financially by artificially DEflated evaluations.
Your tax dollars at work.
Lisa I represent the buyer. It is a totally bizarre situation and I am flabbergasted by it. It'll work out, but not before I get some great blog fodder out of it.
#11, ACTAULLY THE REVIEW OF THE CONTRACT HAS LITTLE BARING ON THE FINAL OPINION OF MARKET VALUE (really) Or so it is supposed to be.
it is more important to see concessions, exceptions, inclusions, exclusions, (saw one with a car as a bonus if they paid full price) etc. Comments in my reports say: "Naturally the contract has been reviewed but carries little to no weight in the final opinion of market value given the subject property."
I watch for inconsistancies, prices bumped up on mls to allow concessions, anything that makes a red flag pop up. Heck I see a lot of low priced listings since the realtor wants to draw multiple bids to see where they might really end up.
Its all a game, may the market price win!
I actually agree with the opinion that the sales price should not be given to the appraiser in advance of the evaluation. Much like the amount sought in a refi, it gives the neutral authority a target. Whether one to hit or miss is up for debate, but if the buyer is paying $300-$400 for an unbiased evaluation, he/she should get one based on that professional's opinion of true market value. It shouldn't be based around a target value. If the bank wants a specific number targeted, and will not accept the findings if not to its liking, let the bank pay for it. It's less an appraisal than a form of loss mitigation in advance. If the buyer is footing the bill, let the damn thing be concluded independent of purchase price and term knowledge.
Just tell the guy paying for the report what the damn house is worth.
Paul,
Like you and my fellow appraiser above, I am all for letting the market decide regardless of sales price. However, it would be a lie if I said I never let sales price influence final opinion of value. Usually it is similar to the situation above. I am at $338K to $342K, instead of taking the low, high or something in the middle. I will look at the sales price, if it is $340K that works as good for me as $339K.
The other is when I am at $338K to $342K, and the sales price is $375K. Then I do a double check on the comparables and with the agent to see if there was something I missed or did not understand.
As far as terms and concessions, as lenders do not typically read the purchase and sale, it is important for the appraiser to comment on those. Like the appraiser above, I have seen sellers offering paid closing costs, TVs, cars, boats, trips, you name it. I have also seen transactions where a part of the buyer's down payment has been silver or gold coins, diamonds, stocks 2nd mortgages on other properties, you name it. While these do not affect value, they do help explain a value of $340K and a sales price of $375K. Believe me I have had both lenders and agents looking for this explanation.
The final reason for review a P&S agreement is to verify that the sale is a true market sale. Are the parties related? Is it a short sale, RELO or a REO? These may or may not affect value but they affect sales price and explanations I have to make.
Truthfully, I have had very few lenders ask me to lower values. What I have seen lately is lenders who are anxious, confused and lost when an appraisal and/or transaction does not fit perfectly in to the form and check boxes they fill out to approve the loan. And it is easier to blame the appraiser than to tell the truth or make an exception.
not giving the appraiser the contract would be like realtors showing all houses and no listing prices allowed, give me a break!
And actually we are required to fill out a specific portion of the URAR and it includes information from the contract. Are wew supposed to put not available we are too stupid to understand the contract and give an unbiased opinion.
we are all professionals here, let us each do our own portion of the job.
lol, no problem!!! I totally understand
It is the banks, underwriters, etc that get my fumes going!!! I love realtors (one myself) and loan officers. HVCC was designed by an idiot, and we are stuck with it. Even FHA jumped on board. I get so stressed over it since I have seen my whole world cave in around me. I love what i do, and doing real estate instead of appraising is my only option right now. I prefer appraising, but heck, at least have a back up plan. Better than working at WalMart, but they are not even hiring. (yes, I checked) lol
it burns ne to have a review "person" in some way off state, question my appraisal. I would venture to say they have NEVER been in Maryland let alone in the city of the appraisal. They have NO CLUE of the market!!! But then again, they have to justify their job some way, so pick on the appraiser, we are easy targets these days.
Appraisers, loan officers and realtors should be allowed to do our job. Big brother has to have his hand in it, so it can mess with us all.
and did I tell you I was black balled by a lender since my values were "OVER" AVM's. rediculous!!!
So much for independence
Never mind appraisals, just bring plenty of CA$H CA$H CA$H!
In find appraisers reluctant to meet me on site and even take information I provide for them on comps.
Gene, maybe the appraiser had a bad experience with a realtor that has no idea how to do comps.
I have run across that, I accept the pile of papers, smile, thank them, and stuff it in my file. I have had realtors bring me comps over a year old, expired and many many actives. Yes actives are important in marketing the property, but closed sales provide the opinion of value. I for one, do not judge all relators by the few rotten apples. MANY have faxed me dozens of so called comps and its quite funny to see what they consider a comparable. But that being said, most real estate professionals I run across know what they are doing and can sometimes provide additional comps I missed (phone call, poor lisitng information, wrong style, too tight of search criteria, etc). Many times we forget we are all a team working in the same world. I have no problem with comps being left or presented to me, but most times I have completed all my homework BEFORE the subject inspection. I spend around 3-5 hours working on a file with area research (things change day to day) comps, stats, MC form, etc. Too many appraisers hit the floor running and do the work after the inspection. can't judge them all by the few. It's about building working relationships, maybe because we worked BEFORE MLS!!! OMG remember the printed books that were weeks old???? LOL We HAD to be considerate and nice to the realtors, for them to help us, back in the OLD days!!! Maybe the youngins' can learnn a few lessons!!!
I've expected to have that problem given the new hands-off doctrine, Gene, but I've actually found the opposite to be true. In most instances, I've drawn appraisers that haven't been overly familiar with the neighborhood, and have been appreciative of my info and comps. I keep hearing about standoffish appraisers, but that has not reflected my recent experiences.
I'd be lying if I wrote I read this blog. I'm just using you for 25 points.
It's always a tawdry back page tryst with you, Lenza. Maxed out your keyboard quota again?
I had an Aunt Myrtle (or was it Ethyl?) in the distant past who kept telling my brother and me to "get both oars in the water" but I agree with you:
"Just tell the guy paying for the report what the damn house is worth."
Good article. Appraisals have become such a part of the game and the outcome.
Good article. Appraisals have become such a part of the game and the outcome.