Appraisers killing deals, comps and high prices

There is lots of talk about appraisers being “deal killers” because appraisals are coming in too low. I’m not saying that’s fiction, and I’m not about to defend bad appraisals either, but sometimes it’s about the deal being unrealistic rather than appraisers killing it.

Image by Sacramento Appraisal Blog

Choosing the Right Comps: I appraised a property in Citrus Heights recently just south of the Placer County line and the City of Roseville. The subject neighborhood is outlined in yellow below. During the course of the appraisal I extended the opportunity for the Listing Agent to share any competitive sales or data that was used to develop the list price. The agent then provided me with “comps” across the county line in Roseville (in the “blue” territory below). These sales of course supported the contract price for the subject property, but were they really adequate comparable sales? Would buyers consider properties in Citrus Heights and Roseville at the same time? Is there any price difference between these two neighborhoods? What does the data say? (see graph below)

Citrus Heights vs Roseville Map - Sacramento Appraisal Blog

citrus heights vs roseville - graph by Sacramento Appraisal Blog

There are surely times when sales in a different city or county might be competitive and therefore worth considering in an appraisal, but not in this case in my opinion. Why? Because the Roseville neighborhood plain and simply has higher property values – not to mention it has a different school district. If I used the “blue” comps above, the subject property would have an inflated value. Bottom line.

What are the market takeaways from this scenario?

  1. Bad Comps: It’s best to use comps (comparable sales) from the immediate neighborhood, but that’s not always possible – especially if the subject property is unique. Ultimately, regardless of where comps come from, the appraiser needs to have a good reason for using them. If comps are from a superior area, they should be discounted to be more consistent with the subject neighborhood. The same holds true for an inferior neighborhood in that the appraiser should add value to those sales to bring them up to the same level of the subject neighborhood. Ultimately the wrong comps can lead to a value that is either too high or too low.
  2. Realtors: If you supply comps to an appraiser, it helps if they are truly competitive sales. Would a buyer for the subject property consider purchasing the comps as a replacement if the subject property was not available? As an FYI, when the agent for the property above told me these two neighborhoods had the same school district (they don’t) and there was no value difference either (there is), I had a hard time believing any other information the agent shared with me about the number of offers or the price level of offers too. It was unfortunate to have the feeling that I couldn’t trust the agent, whether the agent was simply mistaken or a more purposeful communicator.
  3. Appraisers: It’s important to pay close attention to nearby neighborhoods to ensure there is no price difference.
  4. Proper Pricing: The market has been “on fire” in Sacramento as prices have shown an increase lately in many areas. However, it’s still important to price properties according to the market. After all, there are many reasons why buyers will overpay right now. If you are a seller, look at the most recent sales (and listings), and be competitive with realistic expectations. I’ve noticed many sellers are actually not choosing the highest offers because they know it just won’t appraise that high. However, sometimes offers at extremely high levels are chosen, and then frustration ensues when the appraisal comes in “low”. Yet the real issue in these cases is that the buyer offered too much and the seller expected too much. It’s really not an appraisal problem (assuming the value was solid of course).

The Bottom Line: I am not wearing market blinders that ignore there is a real issue with the quality of appraisals. That’s why I’ve written so much about challenging low appraisals. Yet at the same time there are properties being priced very aggressively right now, which is also important to sift through. In cases like this, when the appraiser recognizes value at a level lower than the contract price, the appraiser is simply doing what should be done, right?

Any thoughts or stories to share? If you are an agent, how have the appraisals been for your deals lately? What do you wish appraisers would do differently? (please comment below)

NOTE: This is in no way intended to bash Realtors. That’s not how I operate. In fact, this next year will be my fourth year sitting on a committee with the Sacramento Association of Realtors. If you are looking for a trustworthy real estate agent, my digital Rolodex is full of referrals for you.

If you have any questions or Sacramento home appraisal or property tax appeal needs, let’s connect by phone 916-595-3735, email, Twitter, subscribe to posts by email (or RSS) or “like” my page on Facebook

Comments

  1. says

    Great post Ryan, and I agree with you 100%. My #1 goal with agents right now is educating them on what appraisers look for in comps for the appraisals they do. If we can all get on the same page about what makes a good comps then there might be less deals falling through.

    • says

      Thanks, Tom. I always appreciate your input and your respectful attitude toward real estate agents too. It’s so important to have good communication between appraisers and Realtors, as well as understand the difference in roles between the two.

  2. says

    AMEN! I just wrote a blog on Active Rain about this very issue. Realtors tend to provide comps based upon sales price and not truly comparable features or location. Great post!

  3. says

    Crossing city/county borders? That’s an online “guestamate” trick & why I’ve seen 4000 sf custom homes in Morgan Creek Country Club compared to Antelope 4000 sf production homes.

    Your comments made me curious about city services budgets also. Roseville (not including Roseville Electric) has a budget 2.5 x the size of Citrus Heights – per resident! Their tax sources are well developed, and these expenditures could have positive impacts.

    There are many reasons for value differences between cities.

    • says

      Jeff, you bring up a great point about the difference between Roseville and Citrus Heights. Great point on using far-away comps too. There really needs to be a good reason for increasing distance between comps for subdivision-type appraisals. Ultimately, there should be a compelling reason to cross city lines. Morgan Creek and Antelope are not similar. That just shouldn’t happen. I cannot imagine why it would be truly necessary unless the strategy was to boost the Antelope value (or if an online “valuation” site was doing it). Even if Morgan Creek comps were used, there should be a negative adjustment given to the Morgan Creek home because of the superior neighborhood compared to Antelope.

      • says

        The online “free services” I believe, just use a radius and weight closer comps more. I don’t give them the benefit of using anything more sophisticated than that as it would take more programming time and real estate knowledge, and would not serve their goals.

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