Can a property be appraised above the highest sale in the neighborhood? A real estate agent friend was told recently by an appraiser that the house could not be appraised above the highest sale because that is what Fannie Mae says. Is that true or not? Let’s consider some of the following points.
5 reasons why a house CAN be appraised above the highest sale:
- The Horse’s Mouth: Fannie Mae does not say appraisers cannot appraise a property above the highest sale. I’m not sure if the appraised value in this case was on point or not, but the appraiser was simply not correct regarding the supposed rule by Fannie Mae. Whenever someone states, “Fannie Mae says….”, I recommend asking the person what page of the Seller’s Guide he/she is referring to. 🙂
- Increasing Market: If a market is increasing in value, there is going to be a legitimate time where buyers are simply willing to pay more than most recent sales or even the highest sale. This is especially true when inventory is sparse and interest rates are low. This reminds us too that appraisers don’t make values increase, but rather measure when the market changes.
- Lower Sales: Recent sales may have closed at lower levels, but there is no rule that says appraisers have to use the newest sales. In fact, even Fannie Mae states the appraiser may need to use older sales rather than newer ones. Sometimes lenders tell appraisers to use sales within the past 90 days, but that type of rule is not consistent with Fannie Mae, and it might stand in the way of a good appraisal too. For instance, if two distressed short sale models closed last month, but there are ample model match sales from prior months (and current model match listings at higher levels too), it’s probably best to ignore the two recent lowball sales since they don’t represent the market. Remember also that one or two sales do not make or break a market.
- Zero Sales: The appraiser in this case said Fannie Mae prohibited the appraised value from being above the highest sale. But what if there were zero sales over the past year? Would that mean current value is bound to where sales were at last year? Nope. It can be tricky to see the market when there are no recent sales, but it can be done with time and skill.
- The Best: The house being appraised might be the best on the block or have a feature that pushes it over the top of recent prices. Thus it can make reasonable sense to see a home appraise for more than the others. Of course just because someone thinks a home is the best thing ever does not mean the market is willing to pay the highest price ever. Also, keep in mind every neighborhood has a price ceiling, which means buyers will inevitably only pay so much in that neighborhood before moving on to a different area.
BRACKETING: Please know I’m not trying to give the appraiser a hard time or throw any appraiser under the bus (I love my fellow appraisers), but I did want to offer the above points because there is space for some conversation. While the appraiser was incorrect about Fannie Mae’s rule, I do appreciate the appraiser being aware of the concept of bracketing. Bracketing is basically when appraisers will use some superior sales and some inferior sales to help establish value for a property. This can be a good practice when choosing potential comps because it helps us see the higher and lower ends of a competitive market. Bracketing is not always possible (see points 2-5), but it can help support a value or adjustments. For instance, if valuing a fixer property, we would want to use at least one fixer comp so we know what the market was actually willing to pay for a fixer. Otherwise if we only use remodeled homes for comparison, we are left sort of guessing what the downward adjustment should be for condition. Is it $20,000, $30,000, $50,000, $100,000, etc….? The best way to know what the adjustment should be is to find actual fixers in the market. How much of a discount for condition is there between remodeled homes and fixers? The same holds true for figuring out the value of a built-in pool. Rather than guessing at the value (say $10,000), if we look at competitive home sales with and without pools, we can begin to extract a price buyers have been willing to pay. In other words, if we bracket sales with and without pools, it helps us begin to see the market.
HOW TO THINK LIKE AN APPRAISER (class I’m teaching): Locals, if you are around on July 16th, I’d love to have you come by the Sacramento Association of Realtors for a class I’m teaching called “How to Think Like an Appraiser”. This will be three hours of relevant conversation (and we’re going to have some fun). This is perfect for new agents as well as veterans. My goal is to leave you with insights to apply to your listings and tips for working with appraisers. Register here.
Question: Any thoughts, stories, or points to share? I’d love to hear your take.
If you liked this post, subscribe by email (or RSS). Thanks for being here.
bold, and accurate. Underwriters will not like it!
Thanks Mark. 🙂
Great post Ryan
We have to keep in mind that what we said and what was “heard” are often not the same. The appraiser may have pointed out great recent comparables that all sold lower and the homeowner took that to mean you cannot appraise above the high sales. Well if you have good similar comps that all sold lower, stable market and no support for a higher sale then you cannot pick comps at more of a distance or much smaller and try to support by price per sq ft. Price per sq ft is not an accepted approach to value in the appraisal world. It doesn’t take into consideration quality, site size, condition and so much more. That being said you are spot on. However depending on the lender, most will not accept an appraisal where the adjusted sales price does not bracket the appraised value.
For complex jobs I prefer to work with lenders that order directly thru their appraisal department as typically they have well educated management that know the appraisal guidelines, USPAP and other rules as well as the appraiser.
I always appreciate your take, Cynthia. Thank you. I agree about value too. There has to be support. We cannot pass by everything in the neighborhood to cherry-pick higher sales in a different tract (and then call that market value). A value has to be supported rather than fabricated. Bottom line. The sales and listings in the immediate neighborhood are usually the best indicators of value, and we have to look at them unless there is a compelling reason to pass them by. There was definitely more to the context of the conversation between the agent and the appraiser, but I didn’t want to divulge too much. The agent was left scratching his head about a few things the appraiser did and didn’t do, but most of all the statement of “Fannie Mae says so” didn’t make sense (rightly so).
The old “because they said so” trick. The appraiser should be called on it and asked to provide the proper reference which in this case they would not be able to provide because they are misinformed. Sounds like they have construed a lender requirement to be a Fannie Mae requirement, or are just misinformed and have not taken the time to hunt down the proper documentation to support their understanding. Thank you Ryan for shedding light on this issue.
Yep. Thanks so much Cynthia. There are things we believe to be true in real estate simply because someone else told us they were true. It’s a problem that plagues any industry really. It’s amazing how hear-say can become “truth” over time if we’re not careful. It’s also important to remember Fannie Mae or a lender’s overlays don’t trump USPAP.
Thank you Ryan. All very true and it seems like I’m the one that always ends up appraising the property that is nicer than everything that has sold recently. What a pain to support adjustments and find comparable sales. That is when my fee goes way up and somehow my dollars per hour still end up going down.
Well said. It’s not easy valuing something when it is unlike anything else. True on the hourly rate. So true. Consumers often ask how much an appraisal costs, but it really depends on the complexity of the property, scope of work needed for the appraisal, and the purpose of the appraisal. It’s never just one price meets all. I suppose it’s similar to being a mechanic and making repairs on a Lamborghini, Ferrari, Geo Metro, or a VW bug. The same repair could be made on each car, but the complexity might vary substantially depending on the year and make of the vehicle.
Well said Ryan. Cogent.
Thanks so much Mike.