If an appraisal came back at $327,462.44, would you be concerned? For starters, I think most of us would scratch our heads and wonder how in the world the appraiser got so precise at 462 dollars or 44 cents. Either the appraiser is an absolute value wizard or something else is going on. I can’t speak to why an appraiser would reconcile value that precisely, but I do want to kick around the idea of a range of value in real estate. I’d love to hear your take in the comments below.
Sometimes we get so locked into thinking a house is only worth a certain amount. Most of us wouldn’t get so exact like the example above, but we do often say a house is only worth whatever the contract or list price is. Thus if the appraisal comes in lower, everyone is frustrated. Let’s consider the following points though.
- There is always a range of value: When we sell something on Craigslist, we list a certain price, and we’d like to get that price, but realistically we would probably be happy with an offer somewhere close to the price. For instance, I am trying to buy a drill press on Craigslist right now (for woodworking, which is one of my passions). I found one the other day listed at $150. I offered $100, and the owner said no. I then upped my offer and through conversation discovered the owner wasn’t really set on $150 at all, but rather $125 to $150. If we lined up other buyers for this drill press, they’re probably not going to say market value is exactly $150, but they might instead think market value was anywhere from $125 to $160. In other words, nobody would bat an eye if the drill press sold at $125 or even $160. This is exactly how it works in real estate in the mind of buyers. When assigning value to a property, buyers are going to look at similar homes, consider their budget and loan approval amount, and ultimately be comfortable with a reasonable price range. For instance, buyers might consider a realistic price for the house above to be $323,000 to $330,000.
- Appraisal Comes in $1000 lower than contract price: So buyers make offers on the property, and the seller accepts an offer at $324,000. The appraiser comes out and appraises the property at $323,000. When this happens, many agents say, “This is ridiculous. Why could the appraiser not just give me $1000 more?” I get the frustration because if the contract price fits very nicely in a tight and reasonable range of value, it’s hard to see how the appraiser could argue against that as if the appraiser is an absolute value genius. I’m not arguing for the appraiser here in this example as you can hopefully pick up in the following comments. But I do want to remind us that appraisers cannot invent or give value – even $1000. If the contract price really is pushed above what the market would reasonably pay, and there is no way to really support that on paper (the appraised value has to be supported), it makes sense to see the appraisal come in lower. In this case it may be suspect, but I can’t say that for sure. For reference, it’s actually not fishy for an appraiser to reconcile the value at the exact contract price if the contract price is realistic. When the appraiser does this, the appraiser is simply saying, “Yep, the price is good, and I can’t argue against it.” The appraiser might say something like this in the report: “The sales price falls within the range of values indicated by comparable properties and represents a reasonable value for the subject property based on an analysis of comparable properties and market trends. Therefore the opinion of value in this report was reconciled to the sales price.” Of course this assumes the appraiser wasn’t “hitting the number” so to speak to make the loan work.
- Reconciling to the Lower or Upper End: Despite there being a realistic range of value for a property, sometimes it’s best to consider where a property is going to fit on the value spectrum. I find sellers sometimes struggle with this because they always want top dollar. But sometimes fetching the highest price in the neighborhood simply isn’t possible. Maybe the house just doesn’t quite compete at the very top of the range of value because of slightly less upgrades or some other minor issue. So an appraiser might look at sales at $330,000 and give those sales less weight in the final value because they are slightly superior, but then look at sales at $323,000 and give them the most weight because they are the most similar in market appeal. Additionally, if all the offers on the property were coming in around $323,000 or lower, the market has probably spoken, and it likely makes sense for value to be reconciled around $323,000. Or if we have one high offer at $330,000 and all other offers were at $323,000 or less, this might also say something about the market. Not always, but maybe.
- Willing to Budge on Contract Price: Sometimes it seems the real estate community gives too much weight to the original list price and the contract price. It’s as if the offer is made and then negotiation is over. There is no further budging. But there is still room for negotiation based on the pest report, home inspection, the appraisal, and a number of other factors. When new information is discovered through the course of a transaction, it should be okay to negotiate. Part of a lack of negotiation is the byproduct of a market with such low housing inventory. Sellers have been in the driver’s seat for years, so they have not had to negotiate as much. But as inventory presumably rises in years to come, this staunch belief about the contract price being holy is going to have to budge.
I hope this interesting and helpful.
A CHEAT SHEET FOR AGENTS TO USE: If you are a real estate agent, I highly recommend you communicate in detail about the property to the appraiser during the inspection (or before the appraisal is finished). Consider talking about any upgrades, the number of offers made on the property, price level of offers, and anything that might be relevant for the appraiser to know. Don’t pressure for a certain value, but help tell the story of how the market responded to the property. DOWNLOAD my “cheat sheet” for appraisers and please use it.
Questions: What else would you add? What is point #5?
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Ryan, I love your posts and I understand your point of view however when the market is telling you what a certain home is worth, for example two offers at the same price, wouldn’t be better to agree with the market. It’s really difficult for agents to explain this to the owners.
Hi Jana. Two offers at the same price is a very compelling argument for value in many cases. So if there were two offers at $324,000 in this case, and the appraiser comes in at $323,000, I would be puzzled unless there was a very good reason why value was exactly $323,000. I would think “agreeing with the market” would be absolutely the best thing to do if the offers really do represent the market. This is why I included a statement above that I use when reconciling the value at the contract price. It’s simply okay for appraisers to do this if the contract price is a reasonable representation of value. I don’t think we are saying something different, though seeing there is a range of value is important. Sometimes we do get fixated on only one price and we fail to see the range.
It is important to really look at offers of course. What if there were two offers at $324,000 and they both were getting a 3% credit back from the seller? Or what if the original offers came in at $318,000 and the seller countered buyers up to $324,000 and included 9K back to the buyer? In these cases we might have a situation where $324,000 might not represent the market. If other sales in the neighborhood were coming in lower around $318,000 or so, the case of having two offers higher (with padded concessions) might simply reflect the offers instead of where value is really at. Does that make sense?
I just talked with an agent yesterday about the $1000 lower scenario. That can be extremely frustrating, and I would not be happy as a home owner either. I had one appraiser tell me before, “I never come in at exactly the contract price”. I think his rationale was he did not want to be accused of “hitting the number’. With so much talk about appraisers being sued, I can understand where he is coming from. Personally, I would take an opposite view in that I would rather come in at exactly the contract price if that value was supported. Moreover, in my report I could say the value at the contract price is reasonable because it fits within a reasonable range of value, the value is supported by sales and current listings, supported by competitive price metrics in the neighborhood, supported by trend graphs in the report, and even supported by the number of offers also.
Thank you! That’s great information to have.
As an LA, if you suspect the appraisal will come in low, consider making sure the proposed buyer has cash resources to make up the difference. The appraisal does not have to dictate the final closing price.
“The appraisal does not have to dictate the final closing price.” So true, Jeff. Thank you.
It is too bad that appraisers cannot just report the adjusted value range for lending appraisals and then give their thoughts about if the should fall in the lower, middle, or upper end of the range. I do this all the time of pre listing appraisals. People understand a range better and do not get caught up on a single number. A single number suggests a level of accuracy that appraisers just do not have and we only do it because we’re asked to do it.
Well said, Gary. I also do this VERY FREQUENTLY for pre-list appraisals and consulting work. A definitive number is of course needed for divorce and litigation appraisals, but I wish the lending industry was a little less stringent. In reality there is always a range of value for adjustments too. For instance, a pool adjustment might be given at $10,000, but what if the realistic range was $8,000 to $15,000 when we look at the neighborhood. The appraiser might have to give support for why the adjustment was given at $10,000 instead of say $8,000 or $15,000. Maybe the pool is older in age or the equipment is older too, so it makes better sense for the adjustment to fit on the lower end of the value spectrum for adjustments. We like to think value is so precise in light of the advent of big data or regression analysis, but there is always a range. I agree with you about the power of a range and not getting caught up in one number.
“It is too bad that appraisers cannot just report the adjusted value range for lending appraisals and then give their thoughts about if the should fall in the lower, middle, or upper end of the range. I do this all the time of pre listing appraisals.”
A range reflects reality so much better than a single number.
Yep. I agree. Thanks John.
I just wonder why some appraiser don’t get the right appraisal for example last year I Refinance my house I checked all the houses sold within 6 months in my area or zip code. My house was a lot nicer everything was brand new square footage a lot bigger compared some of the houses compatible in my area. The appraiser appraised my house a lower value I was not very happy and I upset of course. I don’t understand why is that until now I can’t still figure out why? .The answered I got from the appraiser was they can’t put a higher value of my house because if something happens the bank can sell my house faster because it was appraised of a lower value? Is this true? I am ready to Refinance my house again I checked all the houses sold in my house within 6 months. My house is a lot nicer, brand new square footage But I am afraid that I Refinance again my house will not appraised higher I am expecting. So is depend on the appraiser ?I really don’t understand pls . give me advice or suggestions thank you
Hi Aries 64. Thanks for sharing your story.
“The answer I got from the appraiser was they can’t put a higher value of my house because if something happens the bank can sell my house faster because it was appraised of a lower value?”
It’s hard to speak too much into your situation since I am not familiar with your property nor the appraiser. Pulling sales from your zip code may or may not be the best way to value your house. If you are in a rural area where those other sales really are competitive, that might be good. However, if you are in a tract subdivision, pay close attention to what other sales in the immediate area are actually selling for (also look at current listings in the immediate neighborhood). If your house is the nicest one on the block, it may tend to compete toward the higher end of the immediate neighborhood market. Sometimes if a house is overbuilt for the neighborhood, it will compete toward the top of the neighborhood price spectrum, but it won’t go above that level because neighborhoods tend to have price ceilings. Appraisers have to keep in mind what buyers would realistically pay for the house. Part of a realistic amount is surely related to a bank being able to sell the house for a realistic amount, but an appraised value does not have to consider a bank being able to sell the property quickly (unless that is the type of value a bank has requested (that isn’t market value)). If an appraiser came in at $400,000, but a bank couldn’t get $250,000 right after the refinance, there is a value problem. Likewise, if the appraiser came in at $250,000, but the bank could easily sell the house for $400,000, there is a value problem. How much would the house sell for on the open market if you lined up 100 qualified and interested buyers? That is the question the appraiser is more or less answering. The way the appraiser will answer the question is to find similar sales and listings in the market and then make value adjustments for any differences (if the adjustments are needed). The quality of your appraisal will hinge on the appraiser making reasonable comparisons in comp selection and reasonable value adjustments. I believe in detailed communication, so I always suggest home owners to provide information to the appraiser during a refinance. See this post: https://sacramentoappraisalblog.com/2014/11/18/a-cheat-sheet-of-information-to-provide-to-the-appraiser-during-a-refinance/
Best wishes.
Correct me if I’m wrong but if an appraisal is going to come in low, it’s not likely to be low by $100 or $1000. They’re usually low by several thousand dollars or more.
I don’t have any stats to say for sure, but I would guess we’re talking multiple thousands low rather than just $1000 or less. Fannie Mae has a tool called Collateral Underwriter, and I’m guessing they would have the definitive answer (though I doubt they’d share). I do have agents complain about only $1000 though, so I know it happens.
Ryan, you make some very good points here. I think that allowing appraisers to provide a range of value would be very beneficial since buyers and sellers do tend to work in ranges as you illustrated. Each person will react to a property slightly differently since one family will absolutely love a certain feature of the home and be willing to pay a little more than another. I do provide a value range for the pre-listing appraisal I do because it gives a more realistic picture of the market.
Thanks so much Tom. Good for you to use a range in a pre-list appraisal. That’s helpful for clients.
Hi Ryan,
Great information. Truly what you do is not simple! I really appreciate these posts though and getting a little sense. That way when we price homes for a listing, we can set expectations for our sellers even if they choose to list higher than what the comps show.
Thank you so much DeeDee. I appreciate it. I like how you said setting expectations with sellers. If sellers can think in terms of a reasonable range of value, it will really serve them well.