Why do appraisers get a copy of the contract? Doesn’t this set the value stage? Someone asked me this recently, and I wanted to respond with a few thoughts. I’d love to hear your take in the comments too.
Things to Remember about the Appraiser Knowing the Contract Price:
- Fannie Mae Requirement: If you didn’t know, the Fannie Mae appraisal form requires appraisers to analyze the purchase contract. Fannie Mae wants appraisers to list the contract price, date of contract, whether the seller is the owner (a safeguard against fraud), and if there are any concessions offered to the buyer. Moreover, if the contract cannot be analyzed, the appraiser has to explain why. See the text below straight from Fannie Mae.
- Valuable Data: Purchase contracts can provide valuable information to the appraiser. Sometimes there are listed repairs, credits offered, personal property given, or other incentives that might be influencing the agreed upon price. Other times there are a series of counter offers that help tell the story how a contract price was negotiated.
- MLS: Even if Fannie Mae did not ask appraisers to analyze the contract, appraisers would likely have MLS data during a sale, and then the complaint would be that appraisers are using the MLS pending price as a target value. Thus the issue is appraisers need to be objective about the value regardless of the information they have (and having more information is a good thing when valuing a property).
- The Bad: Appraisers can use a contract price as a target, but it shouldn’t be the goal to meet a certain value since appraisers are supposed to be objective and unbiased. We all know properties get into contract too high and too low at times, so appraisals shouldn’t “hit the number” every single time.
- The Good: There is nothing wrong with reconciling the appraised value to the contract price if the contract price represents a reasonable and supported value for the neighborhood. When doing this, an appraiser might say the following: “The contract price falls within the range of values indicated by comparable properties and represents a reasonable value for the subject property. Therefore the opinion of value in this report was reconciled to the contract price.” Or in layman’s terms, “Yep, the buyer and seller nailed it. Value is solid right where they agreed. How can I argue with that?”
Straight from Fannie Mae (p. 564 of the Seller’s Guide): All appropriate financing data and sales concessions for the subject property that will be or have been granted by anyone associated with the transaction must be disclosed to the appraiser. Typically, this information is provided in the sales contract. Therefore, the lender must provide, or ensure that the appraiser is provided with a copy of the complete ratified sales contract and all addenda for the property that is to be appraised. If the contract is amended, the lender must provide the updated contract to the appraiser to ensure that the appraiser has been given the opportunity to consider any changes and their affect on value. If the lender is aware of additional pertinent information that is not included in the sales contract, the lender must provide this information to the appraiser.
Questions: Do you think it makes a difference in the appraisal when the appraiser knows the contract price? Appraisers, what do you like or not like about analyzing the contract as a part of a purchase transaction?
The dirty secrete about contract price is this. A study by FNC by Yanling Mayer. Sr. Research Economist found that only about 10% of all appraisals come in below the contract price. Since market value is the most probable price, most properties sell close to market value (think of normal distribution with most properties selling at the top of the curve), and most appraisers estimate close to market value, then if the appraiser did not give weight to an arm’s length contract, 50% of all appraisals would come in below the contract price. Agents complain now that appraisers come in low too often and it is only 10%. Just imagine if appraisers could not see the contract and give some weight to it? The real estate market would stop or change dramatically. 50% of buyers would not be able to bring additional cash to closing. There would be very high numbers of failed sales or delayed closings without appraisers looking at the contract. The lesson for agents is to make sure that the appraiser knows everything about the contract so they can analyze it correctly and give it weight in the analysis if necessary.
Nice, Gary. You hit that comment out of the park. Well said on the last part especially. This conversation reminds me of a common thread I hear about refinance appraisals being different than purchase appraisals in terms of value. I’d say the appraiser’s target is market value for each scenario, but one huge advantage of a purchase appraisal is the appraiser has more data to consider. Understanding the market’s reaction to the property when it was actually put on the open market can be huge. Sometimes the market shows up in surprising ways and ends up paying more than what the numbers would have suggested. When appraisers have more context from a listing, it can be telling for value (whether higher or lower).
I do a fair amount of pre-listing appraisals, I have noticed that often the sales price is in proximity to my analysis of fair market value. Did my appraisal influence the outcome? Just a thought. Because the appraiser view is retrospective from the effective date it is a wonder that current market value is achieved, particularly in declining/increasing markets. The final question is: can there be a free market when the sales price is unknown/is the market rational?
Thanks Mark. I’m glad to hear you do quite a few pre-list appraisals (I do too). I love your last question. The market has to be aware of prices to be a free market. I’d be curious to hear more from you on that if you have some thoughts.
The initial instinct from many is that it’s not legit somehow for appraisers to know the contract price, but there is some real value in knowing the details of a contract and how the property was perceived when it hit the market. Of course we all know appraisers don’t always get every portion of a contract and certainly not every report associated with a property (pest, home inspection, TDS…). More data can help lead to more accuracy though.
My biggest “misses” in market value have been with cash sales where there is no “vetting”. I have talked to appraisers that have been working in the same market for over 20 years and they often remark, the learning process in a market never ends. Part of that learning is determining what the buyer sees in any given transaction. The largest discrepancy tends to be on the high end homes, where there is often a dearth of sales in the same class. The market I work in is heterogeneous, which compounds the job of distinguishing buyer preferences. Thus it is an art and not always a scientific endeavor. Current focus is to define adjustments through regression. My sense is it is important to run the analysis, but it is far more critical to know what to adjust for than precise adjustment analysis. I sense the market is mostly rational, but is increasingly being influenced by regulation.
So true about learning. There is a real humility about valuation because there is always something new to know, and the market does not always behave the same either. Having that extra layer of market exposure sure does help create context. I completely agree with you about the difficulty of valuing something when there has been no vetting.
My comment on knowing sales price is based on the fact that buyers create the market, appraisers report the market. Without knowledge of sales price, I am not so sure that appraisers would always get it right in terms of looking at the market and could effectively be seen as market managers. If appraisers use it as a target, then they are more like form fillers.
Well said, Mark. Your comment underscores the vital role knowing the price can play in the valuation process. This is also why knowing what others offered can also be data to consider. If 10 conventional buyers all offered $300,000, but the appraisal comes back at $280,000, something is not quite working. Where is the disconnect? All are the buyers wrong or is the appraiser missing something about the market? I’m finding right now in my area that the market is higher than the most recent sales in many areas. It seems previous sales (which have been very sparse) from the Fall and January are simply lower than the current market. Thus I find myself giving Date of Sale adjustments in at least half my reports to account for the difference in today’s market compared to several months back. Whether the market is healthy or not or where it will go is a different story, but right now buyers are willing to pay more for the time being, and it is my job to interpret that. If an appraiser looks at the most recent sales only, it’s very easy to miss the market.
Always some kind of extraneous item seems like. I recently saw a jump in new builds, turns out building stds had changed, requiring added insul and 2×6 const, thus added costs.
This argument makes no sense. It’s impossible to provide an unbiased appraisal if you know the sales price. The market value of a property is not determined by the single buyer and single seller, it is determined by the average of all sellers and buyers in the market. The sales contract, on the other hand, is influenced by the specific buyer, seller, and circumstances. Some sellers are desperate to unload the property, others can wait years to get a good offer. The house may be listed during the off-season. The house may be a foreclosure owned by the bank. The buyer may be a friend of the seller despite it being an “arms-length” transaction.
The current system is fraudulent. The job of an appraiser is not actually to determine the true market value of a property. Instead their job is to justify the sales price in order to enable the bank to make the loan. Case in point: A home we were looking at sold for $418K several years ago, the bank appraisal came in at guess what number? $420K. Well 1 year later the buyer defaulted and the bank foreclosed on the property. Now guess what price the house sold for? $340K. And I’m sure the appraiser today will come up with $340K. The reality is the property was never worth $420K, its real value is around $350K.
The truth is as long as you make an offer that is within $100K of the true value, the appraiser will find a way to justify it. The house might be worth $400K, but you could offer $500K, the seller would accept, and the appraisal would come in at $500K. You could offer $300K, and if the seller accepted, the appraisal would come in at $300K. It’s complete fiction.
Hi James. Thank you for the comment. I really appreciate it. I hear what you are saying and I think there is something to be said for how a contract price can influence the value, though I humbly disagree with your last paragraph.
As long as a property’s value really does fall within the range of value, it is perfectly okay for an appraiser to reconcile the value to that level. There is nothing wrong with that at all. I just appraised something for an owner and I gave him a range actually. I said, “Anything between $400,000 to $410,000 is reasonable, so I’d recommend being happy with something in that range.” This is not what can happen on a Fannie Mae form because they want a specific number, but if this property got into contract anywhere within that range, I would have no issue with an appraiser reconciling the value to whatever the contract price was (as long as it is reasonable and supported, which is the key). Of course if an appraiser is rubber stamping a contract price, that’s no good. You said, “The truth is as long as you make an offer that is within $100K of the true value, the appraiser will find a way to justify it.” That’s just not true though. If you do make an offer within a reasonable range of value though, there is no problem with an appraiser recognizing the offer looks solid. Now if the offer is too low, we really should see an appraisal that comes in higher. Or if the offer is unreasonably high, the appraisal ought to come in lower. But many times an offer is solid because the property has been vetted on the open market already, so chances are the contract price might be a reasonable representation of value already (not always of course).
I don’t know what the situation was with the property selling at $420K and then $340K, though I do know in years past in my area we saw very rapid declines in value. In one summer about 10 years ago properties literally lost about 10% in value that summer alone. It was not an easy time for many of us. That’s not always easy to stomach and when values tank it’s easy to look back and think the property was never worth that amount. But the market was 100% willing to pay those figures at the time. With hindsight we all say values were inflated and of course many buyers couldn’t afford the market had it not been for some funky bad loans. But we have to respect the market was real for buyers and sellers during those days.
Over ten years ago entry-level neighborhoods in Sacramento were selling above $300,000 and then utterly tanked to under $100,000. When values were down it was hard to believe anyone actually paid those prices just a few years before, but during the high times it was a struggle to get into the market and buyers were really willing to pay those figures. I’m not trying to be argumentative by any stretch, but only wanted to illustrate markets can change quickly and what buyers are willing to pay is a real thing (though that can change quickly too). I only wanted to mention this because your example of $420K to $340K could be very realistic depending on what the market was doing.
I’m glad to keep conversation going and welcome and further comments.
So you are simply saying that appraisers just accommodate numbers to allow the closing.
The appraiser should never see the contract, if the appraiser knows what is doing, it will come up with the right number +/- a small percentage.
Who cares if a real estate agent complaint? What is important is to protect the buyer, to be sure is not paying what it shouldn’t be paying.
If the seller still want to sell for a higher than market value, fine, find out a cash buyer and go with it.
Hi DiegoP. I’m not sure if you are talking to me or not, but I’m certainly not saying appraisers accommodate numbers. There is a huge difference between reconciling the value to the contract price if there is support for that and accommodate numbers or rather laizly reconciling value to the contract price that is really not supported. There are many cases where value is clearly not there (or it’s much higher).
I completely agree about appraisers being there as a neutral party. Appraisers are not people pleasers or deal enablers. We don’t have skin in the game and the appraised value certainly isn’t going to make everyone happy all the time. If an appraiser does reconcile value to the contract price, there needs to be support for that value. If not, the value should be different. Bottom line. I’m happy to explain my rationale further, though I’ve likely done that throughout some of the comments in this thread.
The sale contract should be viewed as just one more piece of data to be used in the appraisal process. It should not be relied upon just on face value. It needs to be considered, yes, but only within the context of being a single item in the overall picture.
If 90% of all purchase appraisals are “hitting sale price” then it gives ammunition to those who believe that appraisals are an expensive and time-consuming endeavor that can be eliminated by using statistical data for valuing homes. What it really says is that buyers know the actual market value 90% of the time and that appraisers are just backing up the opinion of the buyers. Why do you need an appraisal if buyers know what the property is worth in 90% of all cases? It never ceases to amaze me how uncanny the wisdom of average home buyers can be in determining the market value of homes. We appraisers know that market value and sale price are not synonymous. Any individual property may have a value of X to any given buyer but that does not necessarily reflect the market value as defined within the appraisal report.
This problem could be resolved easily if Fannie and the other GSE’s would accept a range of values from the appraiser rather than a single point. If the sale price should fall within a range of say, 5%, then the mortgage should be considered to be safe. But that is not the way it is done in the current system. So often times the appraiser will “stretch” to reach the contract price, or, get a little conservative if the indicated market value exceeds the contract sale price. This is not the appraiser’s opinion of market value. Rather, it is the buyer’s opinion of market value.
I have also often wondered why we are required to review the sale contract but we aren’t required to review the seller disclosures. It is been my experience in the past that there is more information that can affect the market value of a property in the seller disclosures than in the sale contract.
Thanks for another excellent post Ryan.
Good point Tom, appraisals should be a range of value. It would be nice to just say that the contract price is in the reasonable range of indicators, but it is at the upper limit of the range. That would be much more useful information for underwriting loans than a single number that is supportive or not.
Thanks Tom. I appreciate your take, and I always enjoy your comments on Tom Horn’s blog too when I see them. Buyers are definitely more informed than ever right now. It’s amazing how well you can get to know a market by getting listings from MLS, Zillow, and Redfin. If you look at listings and sales in a neighborhood over a period of 3-12 months, and watch it all very closely, you can make a very informed decision about whether a price is reasonable or not for the area. Often times a buyer has vetted various portions of the larger market too, so the context of price is extremely well know from a greater perspective. That being said, buyers still overpay (particularly buyers who don’t have “skin in the game”).
I like the range of value concept, and I actually tend to give a range of value in my pre-list appraisals. The market sees a range, so it really serves the client to give a range too.
Gary makes a valid point regarding the fact that if the contract were not supplied then more sales might fall through. I don’t know about you guys but I am not such a good appraiser that if I came in $1,000-$2,000 less than the contract (not looking at the contract until I have developed my opinion of value) that I would stay at that value and not consider the contract price. The real estate market is imperfect and there are a lot of variables and human emotions involved. One buyer may like a kitchen on a house and be willing to spend a couple thousand extra for that, and if the price they are willing to pay is within the range provided by the sales then it should be taken into consideration. Great discussions here Ryan.
Thanks Tom. This has been a good discussion. I think the quality of blog comments is really adding to this post. Thanks everyone.
Great post Ryan!
Always relevant and interesting topics..
To be completely honest as a lender I always think to myself , “That’s convenient, exactly $382,000…”
So to a layman it may seem like the contract price carries some weight and factors into the decision. When you think about it though it SHOULD factor in. It is the price that 2 parties MUTUALLY agreed upon.
Thanks Matt. That’s not surprising to hear at all, and I appreciate your take. It can seem fishy at first glance, and I think this is why I have heard even some appraisers say they never reconcile the value to the exact contract price since they don’t want to give the appearance they are trying to “hit the number”. I think I fall in the camp of reconciling the value to the contract though if it is reasonable to do so. No biggie there because I think it’s a good methodology, and I am not concerned about the appearance of “making the deal work”. If the price is legit and a good representation of the market, let’s call it what it is. Now with that being said, if value is clearly higher, the appraised value should be higher in the report (or lower if market value really is lower). There are times when a property is simply listed too low and money is left on the table, and that shows up in the appraised value being higher than the contract price. Other times a property gets into contract too high because the buyer is offering based on what he/she can afford rather than what the property is really worth.
It’s important market data, not a target. I was surprised the article didn’t mention USPAP (or did I miss it?): appraisers are required to review and report listing and contract data of the subject property.
In this discussion it’s also important for appraisers to understand, and questioners be told, that we appraisers have a ‘bible’ to follow. That ‘bible’ is USPAP. In Std 1-5, it clearly states that the subject’s agreement of sale must be analyzed by the appraiser. Then in Std 2, appraisers are instructed how to report info about the agreement of sale.
Fantastic point, Dave. Thank you. That probably should’ve made it into the body of the post. 🙂
Excellent discussion. I share the view that the purchase contract contains key data to help the appraiser dial-in on the property value. One of the issues I struggle with is the whole “specific” buyer versus the “typical” buyer perspectives. One buyer is a actuary and the other buyer is an artist. One loves the blue kitchen and the other loves the extra-big lot. One of my favorite quotes – “Appraisal theory presumes rational behavior on the parts of buyers & sellers in a local market, while most of the merchandising of real estate is calculated to encourage an emotional response.”
Thanks Mike. There can be a difference for sure between what one specific buyer is willing to pay vs the rest of the market. You’re right that it’s not always easy to distinguish between the two. I always imagine lining up 100 buyers. How much would most of them pay for the property? That’s a great picture of market value to me (assuming of course the buyers are qualified for a loan and/or interested in the neighborhood / property type). In case it’s useful to anyone, here is an image I use in presentations to help explain this phenomenon (feel free to use in presentations yourself). https://sacramentoappraisalblog.com/2014/08/19/what-market-value-looks-like-in-real-estate/
I have a friend who is supposed to close within a week on a new construction SFH built by a nation wide builder. By mistake the sales price was wrongly communicated to the appraiser and after challenging first appraisal and getting a new appraisal (from same appraiser, he/she just used other comps), the difference between contract price and appraisal is (still) 60K (!). Anyone ever had this happen with such a large gap? Renegotiating with a nationwide builder after contract has been signed months ago may be an option but sounds really challenging.
Interesting Karen. I appreciate you sharing. I would be curious if the new price changed the upgrades at all. Hopefully so. Otherwise it’s a wonder how the difference was $60K unless the range of value is so wide as to incorporate a difference that big. Say values were anywhere from $1.2 to 1.3M as an example, so it could be legitimate to reconcile value at the contract price if it falls within the range (any onlookers can see this post for thoughts on a range of value –> https://sacramentoappraisalblog.com/2015/10/27/being-realistic-about-a-range-of-value-in-real-estate/). This underscores though the need for appraisers to be objective and be careful of “hitting the number”. But it also underscores the need for builders / lenders to communicate very clearly too.
Think like an economist. The only thing that would change is a number in an equation, not the profitability of the business itself, so underwriting would just adjust to dealing with different numbers.
Here’s what would happen: Banks are interested in loan-to-value ratio (loan/value or L/V where V is the appraisal value) and would relax on what’s acceptable to adjust for the changed meaning of “value”. Since value is artificially inflated now, the L/V numbers used by lenders are also artificially inflated. Assuming their quants finished college, they know this, and it’s “priced in” to their underwriting policies already. So if a L/V of 0.8 is the acceptable cutoff now, if (for example) the “true” values are actually 90% of what the appraisal values are, then the we can find the equivalent “true” L/V like this: (Use RV to mean “real value” – RV = 0.9 * V). So L/V = 0.8, then L/RV = L/(0.9*V). = L/V / 0.9, or about 0.8/0.9 = 0.8888. The result is that underwriters would just require somewhat LESS down as a percentage of the appraised value.
One could argue that the agreement provides a very valuable data point for the estimation of the current value, and I believe this is a VERY good argument. The most qualified person to make a decision of the fair price of something is someone with skin in the game – the appraiser doesn’t have skin in the game, the bank does. The buyer does, and if foreclosure was easier, the buyer would have MORE skin in the game and this would make the purchase price an even better factor in the true market value.
Anyway, that’s the economist’s take on this. It’s fun to think about good schemes for improving the quality of appraisals – here’s a cool one: Always have 5 appraisers give separate appraisals and average them. They can’t know about each other (hard to enforce, but it’s fun for my idea), and give them bonuses based on how close they are to the average of all 5 numbers. The average of the 5 would be a far better estimate (on average) because it would be no more or less biased as a statistic than a single appraisal, but it will definitely have a smaller standard deviation (same middle of the bell curve, but much less wide). Paying a bonus based on how close to the average gives a clear incentive to get accurate appraisals. (Maybe this is already done for expensive properties? Seems like a good idea)
Thank you so much. I guess in all of this we cannot underestimate the greed of banks. They pretty much got a pass after the housing “bubble” burst. Despite having “skin in the game”, they were willing to be very short-sighted in the loans they made. I mean, what could go wrong with adjustable rate mortgages and stated income loans? That’s an interesting idea about having 5 appraisals, though it sounds very expensive and time-consuming too. Ultimately banks need to have good underwriting and a hands-on approaching when it comes to doing loans and looking at appraisals. In truth most banks probably don’t really want good appraisals. They just want to do loans and get deals through.
I’d say banks are just as greedy as anyone else, but they have much more pull with government – if I lose my skin, I suffer different consequences than a bank. They get bailed out. If bailing out were actually not an option – i.e. actually against the law for government to bail companies out – we might have a big crash or two but the markets would finally start operating responsibly. While were on the topic, I’d force banks to have higher equity requirements – no more 5% of capital is shareholder equity – I’d require 20%, because the shareholders (who ultimately control the bank’s practices) would then have a real interest in protecting deposits. It’ll never happen, because banks control the federal government, and regulators regulate how banks tell them to. Meh.
Definitely the 5 appraisals approach wouldn’t fly because of cost – I was just imagining. 🙂 But I would definitely do something like that when lending for a $5MM house, were I a bank.
It seems to me that any approach which includes knowing the contract price incentivizes appraisers to ‘hit the number’ (most especially if they were to get bonuses for being close to each other.) They are employed by the lending bank, who wants you to hit the contract price.
The bank certainly doesn’t want you to go too far over, because then the buyer wouldn’t have to either come up with a full 20% of offer price down payment (bank benefit) or get hit with PMI (bank benefit).
And the bank doesn’t want you to go under, because then they wouldn’t get to make as large a loan (bank benefit), since they’ve already evaluated the buyer’s ability to pay before getting the appraisal done. Then they’d have to put more work into the loan when the contract is updated, or they’d see some of the down payment money that would have gone to the bank (since 20% is less now with a lower price) going directly to the seller instead.
To further validate my point, look at the appraisals that happen for things like HELOCs, which don’t consider the purchase price at all, but do sure take the bank’s best interests to heart. In this case, appraisers are again incentivized to ‘hit the number’: current amount owed plus credit line plus just a little be more to get under whatever the cutoff is for making the loan at all. Banks charge higher interest the higher the LTV is, so they want the appraisal to come in at a higher LTV (that isn’t too high), so they can make the most profit.
If the house is egregiously over-leveraged, or the market has truly just plummeted, then the loan may be denied outright as too risky, fine. If the house only has 8 years of mortgage left and so there’s no way they can try to come back as being over 70% LTV, then fine. But if the owner made a substantial down payment on the 1st mortgage, and the market has increased every year in the 4 years since, the appraiser still conveniently manages to provide a number that allows the bank to charge a higher interest rate than they would with a 70% LTV. Especially if the applicant has credit scores at 800+, the bank knows they’re a great credit risk, and then if the appraisal comes in with an eye to the purchase price plus market increases, they’d have to offer the lowest interest rate. If it comes in over 70% LTV… bank benefits.
Again, the bank requires a current mortgage statement before they’ll have the appraisal done. While that’s used for ability-to-pay calculations, if they already have pay stubs, credit reports, etc, (not to mention the signed application stating everything provided is true), the mortgage statement doesn’t really add anything for the applicant’s ability to pay. And yet, it’s required ahead of time, because it sure does set the sweet spot for how much they want the house to appraise, doesn’t it?
Hi Madison. Thank you for your detailed comment. I really appreciate your thoughts. It’s understandable for the bank to have a number in mind for them to do the loan, though appraisers don’t know that number when doing an appraisal for a refinance. 10+ years ago banks would send appraisers an order with an “estimate of value” at times, and the “estimate” was really their target number. These days since Dodd-Frank went into law in 2010, that does not happen any longer (or shouldn’t). Appraisers don’t usually know how much is being borrowed either. I heard of an appraiser being kicked off a local direct lender appraiser panel because the appraiser was asking the owner how much he was going to borrow. I mention that because appraisers don’t really usually know what is going on during a refinance unless that information is volunteered somehow.
I’m shocked that Fannie Mae can make the market rules. The State of Washington and Iowa both require appraisers to do their homework. A copy of the sale agreement is forbidden to be given to the appraiser. They have to actually find comps and compare the plus and minus of each property and attribute values within the past 6-12 months. It alleviates the potential for appraisers to work too closely with the banks/lenders in order provide appraisals so that deals would close that are detrimental to the buyers. That was one of the leading reasons that the mortgage crises occurred in the early 2000s and the reason so many homeowners today are still upside down in their mortgages.
It’s ridiculous to assume that a seller would put his home on the market at a price that is way outside of the market price. The real estate agent on both sides of a buy/sell agreement need to do their jobs to make sure the sale price and the purchase price offering are within the comps in their areas.
Everybody needs to do their job and the checks and balances will keep the markets fair. The threat that deals won’t close is totally a scare tactic. If a seller wants to close and the appraisal is too low, the seller negotiates to reduce the sale price, appeals the appraisal, or brings the sale price down and asks the buyer to put more money in up front (i.e., meet in the middle) to satisfy the lender.
The government needs to stay out of the deal making and make everybody honor their responsibilities and actually earn their commissions and fees.
Hi Laura. Thank you so much for your take. I appreciate it.
I’m a big fan of the government staying out of the way in most regards. I hear you on that. Regarding the contract situation, I emailed an appraiser in Washington and he says that is not true. If you have a different source to substantiate the claim that it is illegal for the appraiser to see the contract, I would definitely like to hear that. Or maybe in your experience with a certain type of appraisal work the contract is not seen? During lender work it is seen according to a colleague.
I do agree with you it was a problem to have appraisers work way too closely with banks. Yet there were many issues much bigger than what was happening with appraisals that made the market move the way it did.
Regarding sellers pricing reasonably, you’d think that would happen, but in many cases it does not. In a perfect world agents would always be in tune with where value is at and sellers would also listen to their agents. But that’s ideal. The Listing Agent really cannot force a reasonable price either. So an agent might give advice to put the house on the market at a reasonable level, but the seller is the one who decides the price. I can think of so many sales right now that are priced too high in my market. This is exactly why there were 210 price reductions yesterday.
I’d love to hear your take on anything. Feel free to follow-up if you wish. Otherwise thanks for the convo.
The best appraisal is what a qualified buyer is willing to pay via the contract purchase price. Banks make their money off of house lending. No one really “owns” a house even if paid off–property taxes ad infinitum. All this appraisal mumbo us jumbo etc..etc..is noise. Doesn’t exist in most other countries–it’s an opportunistic business hu$tle-create needs and wants and scare tactics of deals going south, and real estate salesmen giving videos about ‘low appraisals,’ etc…11th hour renegotiation tactics knowing the home “won’t appraise”….IF you cannot afford the home don’t buy it, or IF you cannot put more money down then, don’t borrow 95-97.5%. It’s 2008 all over again. Almost everything in the us empire was hu$tling and huckstering. Why would the us house buying and selling game be any different?
Thanks for your thoughts Margie. I appreciate it. Have you had an experience recently that is driving your thoughts here? I’m curious. No need to respond, but I’m always glad to hear if that’s the case.
I’m curious what the appraisers see when a Lender is selling a property at Short Sale that does not have a fixed price yet and is awaiting the Last & Final Appraisal in order to set the selling price.
In my case I presented the appraiser with 15 different estimates for necessary repair in different categories of: Exterior roof estimate, Interior ceiling estimate, HVAC estimate, Plumbing estimate, Replacement window estimates, etc. and showed the appraiser all the various problems with the home and yet the appraiser chose to ignore all of the problem issues. Why would they behave that way? Lastly, they ignored the FEMA 50% Rule and depreciation which affected the home in a flood zone and that drastically affected the price of the home.
I’m still contesting the appraisal price and the FL Real Estate Appraisal Board came back w/ numerous errors & omissions and found the appraisal negligent or grossly negligent. However, I really am not blaming the appraiser because its my gut feeling that the LENDER put the appraiser up to it to meet a certain price they needed for a home that was vastly under water.
Hi Jim. A lender should not be providing any sort of value they’d like to see for the appraisal. That is off limits and it shouldn’t happen. Theoretically a lender would simply order an appraisal for short sale purposes and then the appraiser comes up with the value. Hopefully there wasn’t anything fishy beyond that. I have no idea what happened here of course. I hope you’re able to find some middle ground here with the lender. It’s hard to speak into what the appraiser ignored here, but obviously an appraiser should consider all relevant factors. Just keep in mind there isn’t always a one-to-one relationship for the cost of a repair compared to the effect on value. So just because there is an estimate to replace windows doesn’t automatically mean the appraiser is going to deduct by that amount.
Best wishes.
Hi Ryan, Thank you for your reply and I agree w/ you just because their is estimates doesn’t mean an appraiser has to use or consider them. However, I had about $325 to 350k in damages that were being ignored. Ironically the lender (Champion Mortgage) ignored all information I presented to them and was standoffish from start to finish. After the last & final appraisal was found negligent w/ many errors & omissions Champion Mortgage when confronted: ” Had No Comment ” and they knew it was bad having read the Real Estate Appraisal Final Order.
That’s a hefty amount of damage. Wow. The appraiser still has to consider how that damage fits into the valuation of course. This sounds like a bad situation and I’m so sorry to hear about it.
The 50% Rule is a regulation of the National Flood Insurance Program (NFIP) that prohibits improvements to a structure exceeding 50% of its market value unless the entire structure is brought into full compliance with current flood regulations. The home must be elevated or raised to meet the updated new elevation required by FEMA and or bulldozed & destroyed. When considering depreciation if there is more repairs & restoration then 50% of the market value and the home cannot be raised to meet the new elevation the home must be depreciated to zero structural dollars. In my case the home had four different appraisals and none took into consideration the FEMA 50% rule or the depreciation. In short the lender had the appraiser meet their number in a home that was severely underwater when indeed the home had No Structural Value. How will the Errors & Omissions Insurance company react to that?
I understand that rule and I’ve definitely done appraisals for owners trying to rehab properties within flood zones within the confines of these rules. I will say there are properties bought and sold all the time within these zones that very clearly have way more work done beyond the legally allowed amount, so regardless of the 50% rule appraisers still have to look to the market and answer the question as to what buyers are willing to pay for something. In other words, on paper a house might look like it cannot be rehabbed, but in reality if investors are buying those homes and rehabbing them, appraisers cannot ignore that reality either. This is where we need to look to the comps for the answers. I’m not trying to argue with you or minimize your situation in any way because it sounds like there has been blatant negligence. I just wanted to clarify that there is any extra layer here that I think appraisers have to consider because appraisers still need to look to the market for the answers. Again, I’m so sorry to hear about your situation and I hope the right things unfolds here for you. It’s certainly unjust if you’re getting inflated appraisals. Best wishes.
If our contract price is $230,000, and the house appraisal is closer to $400,000 why does the appraiser that I paid $750 and was at the property for only 20 minutes(not joking),care why our contract is approved at such a low price?
Hi Nick. Thanks for reaching out. A few things:
1) The appraiser is asked by the Fannie Mae form to check a box stating whether this is an arms-length transaction or not. If you know the seller, for instance, and they are giving you a deal, then the appraiser would probably be checking “non-arms-length.” This likely has no bearing on value whatsoever. It’s just a formality to be asking a question like this. Also, I would ask just because I would want to know what I was getting into. I’m always trying to understand the story of value and sometimes there are details found in the conversation. For instance, what if the seller gave you a huge discount because of foundation problems? This is exactly why an appraiser would be wise to ask. My two cents. If an appraiser did not ask about this, I would be more concerned.
2) Keep in mind the appraiser might not be getting that full amount. Middle-man companies called AMCs tend to skim off the top of the fee paid by the Borrower. So the appraiser might be seeing $500 or so. Just a heads-up.
3) I get your concern about the appraiser being there shortly. I have a different blog post about that actually. As long as the appraiser is able to do what needs to be done, that’s fine. But if the appraiser was hasty, that’s another thing and you have an absolutely valid point. 20 minutes is definitely quick, but if this is a smaller house, I totally get it. Also, we’re also in a global pandemic and I’m good with being as efficient as possible. Keep in mind the inspection part is the easy part and is sort of like the tip of the iceberg for the actual work involved.
Thanks again. I hope things go smoothly from here on out.