There is much discussion these days about “low” appraisals and even “Appraisal Hell”. Sure enough, these issues showed up again yesterday in an article on Reuters entitled “Special Report: What’s a home worth? Pick a number, any number“. I wanted to give a few comments about this article as well as some reasons why homes sometimes appraise for less than the agreed upon price between a buyer and seller. My two cents:
1) Price is too high: Sometimes the agreed-upon price on a home is too high. If one buyer and seller agree to accept a certain amount for a property, the agreed upon price is not always consistent with market value. There is a real difference between price and market value because market value would gauge what a typical buyer would pay for a property, not just what one specific buyer is willing to pay. As appraiser Patrick Egger says, if you lined up 100 buyers to purchase a particular home, what would the majority of these buyers pay for the specific property? The answer to this question would probably produce a pretty good number for what the home is worth. But you might have a small pool of buyers who would be willing to pay far above asking price, right? Maybe it’s a “honey, buy this house at any cost” situation, friends or family live next door, or simply a high offer is presented to beat out all other offers.
2) Really bad appraisal: Let’s face it, there has been some very warranted scrutiny of the appraisal industry over the years, and especially since May 2009 when HVCC was implemented. Maybe the appraisal really was bad (inexperienced appraiser, out of the area appraiser, really quick shoddy appraisal, appraiser didn’t know the market and just guessed at value). You know appraisals are an issue too when phrases like “Appraisal Hell” are coined to describe that place where Borrowers go when appraisal issues hold them back from getting a loan. However, it’s important to keep in mind that a “low” appraisal isn’t always due to a bad appraisal for reasons explained in this post.
3) Strict Lending Guidelines: The article above gives a scenario where a couple paid for seven appraisals with different lenders before deciding to call it quits (because the appraisals did not come in high enough for their loan). My heart goes out to the couple for all the money they spent, but part of me wonders if there is more to the story. I wonder why the two appraisals at asking price were deemed suspicious by two different lenders. That’s a red flag in my mind, or maybe it’s just a testimony to hyper-regulation and lenders being finicky. But maybe the appraisals looked inflated for some reason too? Guidelines in lending have certainly become more strict in recent years, especially after the housing bubble burst.
4) Counter-offer to “No Man’s Land”: Sellers sometimes counter the buyer with a higher price despite the buyer offering at asking price. At times this counter offer works out very well, but other times it might push the property into “no man’s land” (above market value). Many experienced local real estate agents are careful about this scenario as they work with their clients. In these instances, if the appraisal “comes in low” (below the higher accepted contract price), the value might not really be low, but rather indicative of where the sales price should have been. Of course sometimes properties are marketed at lower prices in order to get multiple offers quickly, and it’s not too surprising to see that market value ends up being above the original list price in many of these cases. Ultimately, it’s nice to be able to boost up the sales price and try to fit concessions or credits in a higher sales prices, but sometimes there might not always be room to do that.
In the past few months I’ve been hired multiple times due to bad appraisals. Usually a client or local real estate agent will ask me to do a full appraisal to help give the buyer a better sense of the market (this is usually when buyer’s are coming in with a more sizable down-payment than 3.5% – FHA). Other times clients will hire me as a consultant or reviewer (no value rendered) to take a look at the original appraisal they disagree with. My job in these scenarios is to review the report and point out some things for the original appraiser to consider.
What do you think? What has been your experience with appraisals? What is your remedy to deal with a “low” appraisal?
If you have any questions or a need for an appraisal or consulting in the Sacramento area, give me a call at 916.595.3735, send me an email, catch me on Facebook, or see my company website at www.LundquistCompany.com.
Great job, Ryan. Good analysis and thanks for pushing back. I hope you don’t mind if I share, while giving you credit of course.
Thanks, Bill. Share away. Credit is always nice. I hope this will help to foster conversation. That’s what we need more of in the real estate industry (and good appraisals too). 🙂
Morgan Creek is most interesting for me to valuate – I’m comparing custom homes with chef’s kichens, pergolas, guest houses, gyms, water-views, pools, home-theatres, EVERYTHING you can think of ‘cept maybe a heliopad! lol
Last time I looked the comparables had a $100,000 range. So yeah, it’s “pick a number” easy for the appraisers who have an offer and an amount. For me doing a BPO, I find the home that the Subject won’t surpass in price and work backwards from there.
Thanks Anne for the comment. I checked out your website. It looks like you also do property management. That’s great. I hear what you are saying. The thing is that appraisers should not be letting the sales price influence the value opinion. It might seem easier to have a sales price hanging around, but the sales price may or may not be a good value point. The appraiser needs to provide a value that is not biased or influenced by the sales price at all actually. So the methodology for the appraiser ought to start in a similar fasion that you do – from scratch. You really have to know your stuff putting together BPOs. Good luck with all you’re doing.
I want a sales price – I’m jealous lol – i’m flying blind – I’d love the help an offer would give me because the new spread between comparables at Morgan Creek is $183,000. So I thought I’d just look at the ones w/pools and their spread is $310,000
And that, imo, is why a BPO could go either way. But it doesn’t reflect any sort of collusion, ignorance or fraud – so it’s really a case of “pick a number” out there and we can find comps to justify it.
Morgan Creek is definitely interesting. There is such a wide-range of square footage, level of upgrades, and huge differences in location too. It certainly would be much easier to start a BPO after a previous listing expired so you could at least see if a certain price had been attractive in the marketplace. Wouldn’t it be great if all our research in the marketplace was so easy? Good luck with these. Hopefully some of your BPOs will turn into listings too. Thanks for the comment.
Great blog post Ryan. The first thing I thought when I read that article about the couple paying for 7 appraisals was why the two appraisals at asking price were deemed suspicious by two different lenders. The funny thing about most of the articles about appraisal issues use the term “low appraisal” but rarely ever say any thing about a high contract price. You have put together a good list of reasons why appraisals “come in low”.
Good point, Bryan.
This issue has greatly resurfaced in the last couple days, along with this interview on Fox: http://goo.gl/e1jcM (don’t even get me started). Another interesting part to the “appraisal hell” story is the $1,600 dollars spent on 7 reports. Do the math and that is less than $230/appraisal. What was the quality like on ANY of these reports?
Thanks for the video, Ben. Good point about the fees here. There are some real issues in the real estate industry right now. I think “low appraisals” are an easy target. They are certainly part of the problem, but I wouldn’t say they are the driving force in the struggling real estate market or economy. There are many things that need to change.
I like the points raised in this but I think it fails to address a driving force in the bias that impacts the value estimate of a lot of the appraisal reports I have reviewed since HVCC and now our brave new world. Appraisers BIAS their reports low because we have all been taught at some point that “low is safe”. The newsletters our boards put out are full of juiced values getting the appraiser into hot water. How many articles have you ever read about the value being too low and the appraiser being disciplined? In NC I only remember one, a single instance where the appraiser was low and then disciplined by the board.
I think that this is at least in part because until direct pressure to juice a value was reduced and the required lip service to accurate value being pushed by senior management at the lenders has been reasonably effective in keeping a lot of this pressure off appraisers. It used to be well known that an appraiser who came in low only did this once before they were forced to seek out a new client. At least for now, this overt pressure of “make the value or find a new client” is substantially reduced. I think it has been replaced by “make the value or you will be answering ‘addendum’ requests for the next month.” but that’s a whole other topic!
Thanks Paul for your thoughts. Appraisers don’t get reprimanded typically with low values. You are right about that. Interesting commentary. Do you think maybe the current “less-pressured” environment helps to breed a “low is safe” mentality? Do you think appraisers these days are not trying to appraise true value, but only safe value? The video that Ben linked to above seemed to make this point. I looked up your website and it looks like your company handles quite a bit of review work in NC at least. I’d be curious to hear your perspective.
I think that tendencies you mentioned, where people indeed consider that ‘low is safe’ because they have seen that going over their heads has always knocked them down (lets take the classic example of the economic crisis). And I do think the best way to fight bad appraisals is, how you have been doing it, giving the buyer a better sense of the whole market.
Thanks Ruby for the comment.
Good job Ryan! I really appreciate the time and effort you put into this post. Someday a reporter will do their job, and dig into the reasons why seven appraisals came in low (come-on, this is what got into this mess in the first please). Whenever I read one of these articles I always crave for the reasons, because from my perspective someone getting seven appraisals is trying to make something happen. Most people in the real estate industry don’t understand “Market Value”, and believe that if a buyer and seller have a meeting of the minds then that is good enough, and the deal should be done-period. The real estate industry is going through a paradigm shift, and it will probably take another two years for the dust to settle and we get a new normal, until then appraisers are going to get beat-up. I’m glad to see we have professionals like you who can articulate a reasonable position. Keep-up the good work.
Thanks Michael. I appreciate your insight and your encouragement.
Hi Ryan…I’m afraid I am on the other side of the fence here….I just went through a low biased appraisal issued by one of the big lenders. It was obvious that there were errors, so I tried to get them to review it to have the appraisal completed again, by a different appraiser. They essentially just waived us off, saying there was nothing wrong with it. So I decided to educate myself and check it line by line, with the help of a private appraiser and also our County Appraiser. There was substantial devaluation of my property due to adjustments that were not made, adjustments made without any data support and a stressed sale that was used as a comp and not adjusted and many other things as well. The sale was lost as a result of the low appraisal, as the buyer needed the appraisal for the 5% structure of his loan. This is happening again and again. I realize that you are on the West Coast and I am on the East Coast, but I have read hundreds of such stories across the nation. The truth is that the banks use Appraisal Management companies that are the lowest bidders for their business. They let it be known that they expect the appraisals to stay low or they will not be using the appraiser. I have heard this first hand from private appraisers who refuse to work for Appraisal Management Companies. These are the appraisers who are assigning value to our property. And frankly, I don’t care what the average person is willing to pay for my property. The environment today is that the buyers (your average person) can steal property at really low prices and for the most part, they love the low appraisal until they realize that the seller is not lowering their price and the purchase is lost. I had a buyer come back three times trying to work something out. I was willing to help them with some seller financing for the difference, but the bank would not allow a seller trust in second position to protect my financing for them. So the truth is – the lenders are killing the deals over and over. The interest rates are so low that they openly say they do not care. I have prepared a very detailed review on the appraisal and along with the lender, it is going to every regulatory agency I can find. While you may be a good appraiser in your area, in this case the appraiser should lose his license and I hope that he does. Shame on the big lenders all the way around.
Christina – not ALL appraisal management companies use appraisers who bid the lowest. Quite the contrary in my case, I only work with ones that pay a full fee (or pretty close to it).
Painting a broad generalization these companies is simply not true. I recently did an appraisal on a home that was built last year and is now worth over $100k more because of improvements and a slightly better market. The AMC didn’t pressure me to come in low, and they even sent me more work a few days later.
Are there bad appraisers and lenders out there – absolutely. If this appraiser made errors then an enforcement agency should take action. Just remember there are many of us who are in it for the long haul – plus we have to conform to many strict regulations that most people don’t realize.
Thank you. Well said, Ben.
Christina-
I’m sorry to hear of your situation. Ben’s comment is correct in that not all Appraisal Management Companies (AMCs) use the lowest bidder. There are certainly some that email a huge list of appraisers and whoever bites first (at a very low price) gets the appraisal. This ia not a good way to do business at all. On the other hand, there are other companies that work to establish good relationships with local appraisers. My hope is to see some of the bad AMCs weeded out in coming years. I don’t do business with clients who send out mass emails for a number of reasons. I have personally not had a client say “stay low or we won’t pay,” but that’s just me.
On top of all you presented for a review, did you supply any other sales? Or do you have a situation where there are very few sales? That can be very helpful for the lender or appraiser to see, and substantiate your case too.
You mentioned, “I don’t care what the average person is willing to pay for my property.” I only wanted to mention that appraisers are looking for market value on a property. Market value is not the very highest price one person is willing to pay (there will always be one person willing to pay far more than anyone), but what would a typical buyer pay for a house? If you lined up 100 buyers, how much would most of them pay? That’s a good gauge for what market value looks like.
I hope your situation works out. I’m so sorry to hear how frustrating it’s been for you. Your situation is common and I don’t make light of that at all.
Sincerely,
Ryan