I’ve been getting lots of phone calls and emails about low appraisals over the past couple months. Is something in the water? What’s going on? Let’s talk about this briefly. Then I have some quick thoughts on weed and rent control.
5 things to remember about “low” appraisals:
1) This is common when the market slows.
2) This is even more common in a declining market.
3) It should happen if the contract is too high.
4) It can spur negotiation instead of kill a deal.
5) The value of course is too low sometimes.
The problem: During the housing “bubble” we expected appraisers to always “meet value” so to speak. Yeah, that wasn’t good. But it seems like the residue of that expectation still exists today. So when an appraisal comes in lower than the contract price, it’s often treated like a grave market sin when in fact this should be something that happens from time to time. I know this sounds a bit Pollyanna to say, but I’d like to see the real estate community view appraisals this way instead of thinking appraisers should “hit the number” all the time. Appraisers have an important role to play in the market and if they’re doing their job correctly it won’t always lead to smooth escrows.
Botched appraisals and what to do: Of course we don’t live in a perfect world and appraisers legitimately miss value at times. I’m not glossing over that frustration and I realize there are horror stories out there. When this happens it’s reasonable to go through the lender’s process of asking the appraiser to reconsider the value. I don’t think any appraiser looks forward to this, but it’s part of the business, which is why I advocate for data-informed conversations and ethical protocol. In fact, here’s some tips and a form I suggest using if the lender will allow it (otherwise you’ll need to use the lender’s form).
Note to appraisers: I know this post will not sit well with some colleagues, but this is a part of the business and my goal here is to elevate the conversation (and hopefully only see rebuttals when they need to happen).
Rent control: I have an upcoming interview about rent control with an appraiser colleague in the Bay Area (and I’ll likely do others too). We’ll talk through rent control dynamics and some things to consider for value. In the meantime, here are two quick thoughts. One, rent control is a huge deal, but we’re going to need some time to really understand the fine print as well as its effect on the housing market. The temptation is to look for an immediate impact, but we might need years to fully understand the effects. Secondly, rent control will change the way properties are advertised. Gone are the days of saying things like, “Rents are below market and you can raise them to X amount after buying.” The problem is market rent isn’t so straightforward any longer because not all units can be legally rented at the same level. Remember, rent control does not apply to single family homes. My advice? Be careful with assertions about market rent.
Landlords getting huge weed fines: There was an illuminating piece by Capital Public Radio on Sacramento fining landlords when tenants turn rentals into “grow” houses. We’re talking big money too as the story highlights an example of a $137,000 fine. The author of the piece states the City of Sacramento has issued almost $100M in penalties over the past two years. I’ll let lawyers figure out if this is legal or not, but from a market perspective this is something to watch. What are the positives and negatives of this type of enforcement for the housing market? How will this affect investors?
I hope this was interesting or helpful.
BIG MARKET UPDATE: I’ll be giving a deep market update at SAR on September 24th from 10:30-12:00pm. My goal is for everyone to walk away with an understanding of how the market is moving, ways to describe it, and some ideas for business in 2020. Sign up here.
Questions: What is the sixth thing to remember about low appraisals? Any stories to share? Any thoughts on rent control or the weed dynamic right now?
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Interesting. I’m getting similar comments about low appraisals and have offered advice on rebuttals. Sometimes the properties are difficult with poor data available. Other times, I scratch my head.
With FNMA appraisal waivers for easy properties, I suspect the industry will have more questions about appraisals because of greater uncertainty. Also, us appraisers need to recognize that lending work will get harder and we need to up our skills.
Thanks Joe. I always appreciate your take and insight. I agree with your thoughts. On a side note, appraisal waivers are sometimes happening and properties end up closing higher than they should. That’s a great thing for an easy close, but not so good for the owner in the future when refinancing and finding out the property was never worth that amount. Moreover, an elevated sale may or may not pull the rest of the market up with it. Thus if we have just one “lone ranger” so to speak, we have to really weigh whether this property reflects the market or if it’s just an outlier. This is important when choosing comps and my sense is sometimes we’re going to have to ignore some sales because of waivers. As always there are many layers to consider…
Good point Ryan. We plan to ask Metrolist for a flag to report whether an appraisal was done or not because of this issue. Also would be nice to be able to track how waivers are affecting sales transactions too.
That would be an incredible data. I wonder if there would be hesitancy from the real estate community. I appreciate our MLS because they listen to appraisers. I just shared some data the other day about multiple offers among current pendings and another appraiser is trying to get his MLS system to include multiple offers (and the number of offers) as a field.
We’ll work on getting appraisal Y/N in. Would be useful to all of us I suspect.
That new data field would only benefit appraisers. It would not be useful in a positive manner to anyone else. I foresee appraiser’s excluding any comparison properties that may have had a waiver if that new field was to be approved even if it may have been appropriately priced. I doubt anyone is going to go out of their way to appraise a wavered property in order to ensure their contract property is correct. I would vote against this.
Thanks for your take Alex. I appreciate it. I’d love to hear other opinions here too. Anyone can pitch in.
I get your concern and I hope appraisers wouldn’t look past comps as such. I don’t think that would be the case. It would be great for context though. I find something similar hopefully happens with the other fields. Just because there weren’t multiple offers doesn’t mean the appraiser will give less weight to the sale or pending. It’s just one bit of data. In my mind I’m a fan of more data to help understand a transaction and the terms of it. Concessions, credits, multiple offers, appraisal or not… I appreciate understanding all the layers that might help tell the story of the property. In a day and age of mass data, why not have more?
Regarding waivers, there is certainly a place for them in today’s world. The thing is a Borrower still has the option to get an appraisal. I would guess most do not, but there are definitely Borrowers who do go through with an appraisal when they feel the contract price is too high. An agent I was talking with not long ago was in contract about 10-15K too high (with an appraisal waiver in place), and in this case the agent recommend for the Borrower to move forward with the appraisal. It ended up being a wise move since the appraisal came in lower and the contract price was adjusted. I get how difficult it is to walk away from a deal that feels secure with a waiver, but I had to give props to the agent to look out to be sure her client was not overpaying. At the same time I have colleagues who have appraised homes that previously had a waiver the prior year and it was very likely a rude awakening to the owner when the value didn’t come back at what the home was purchased for.
This is sticky and I think agents and loan officers walking buyers through situations like this are going to have to really help buyers understand their options. The thing is overpaying slightly feels okay in the moment, but it doesn’t feel so good in the future. Moreover, overpaying in a down market definitely won’t feel as good. Again, I understand the bliss of a waiver. I do. And I also understand the gamble of going through with an appraisal too.
Thanks for your post! I enjoyed it as always. My opinions have been lower on contracts more than what was true in more recent years. There’s a little “unicorn” in the water right now. And things are slowing in my market in terms of appreciation, and it’s not all seasonal. To you other point, I totally agree with you that some appraisals are below what is reality. I was hired by some investors to perform an appraisal on one of their homes where the appraiser for the lender came in considerably lower than the contract price. They wanted to use my appraisal to contest the other appraisal. The other appraiser used sales that were not only inferior in terms of condition, they were not even the same style home, in a neighborhood where there were numerous comparable sales with the same style and condition as the subject. Their “market adjustments” were half of what I estimated them to be. Interestingly, I my opinion was much higher than the other appraiser’s opinion. However, my opinion was slightly lower than the contract price. All of this highlights your points. Keep up the great blogging!
Thanks Jamie. It’s interesting to hear that situation and how your value was even lower than the contract price. Sounds like you did a solid job.
I often tell real estate friends that the best time to challenge a low appraisal is before the appraisal begins. Price it right and you’ll lessen the chances of having appraisal “issues”. Granted, there is never any guarantee, but being priced correctly is a huge step in the right direction. I also advocate being proactive about communicating well with the appraiser the lender sends out. For any onlookers, please consider using my info sheet to help share valuable information with the appraiser during the inspection (without pressure to “hit the number”). If the appraiser doesn’t want it, that’s fine. But why not be prepared with useful information? The irony is I find often this type of information often gets shared after an appraisal comes in lower. Why not just be proactive from the start instead of after the appraisal is finished? https://sacramentoappraisalblog.com/2014/10/09/a-cheat-sheet-for-agents-of-information-to-provide-to-the-appraiser/
Great advice!!!
Ryan, I could not agree more about pricing the property correctly.
Thank you for the appraiser cheat sheet. I usually put something minimal together for the appraiser by leaving it at the property if I don’t meet them there, giving it to the seller to pass on to the appraiser with no pressure or asking if they would like to have it. Your form has more information and I’m happy to have it.
Thank you for writing these blogs and I look forward to your upcoming presentation at SAR.
Thank you so much Cheree. I appreciate the kind words. Very cool that you’re coming to the presentation. See you then.
It has been my experience that real estate agents do not know or use the term Market Value. They have no idea that it is a process that is applied in a systematic way.
It is not the Sales Price, or the Highest Price, it is the Most Probable Price supportable, without abnormal motivations, concessions, sweeteners, decorator allowances, personal property, etc..
Market Value is simply not in the vocabulary of the Realtor community.
I have an presentation that I give to MLS boards on Sales Price vs: Market Value as Defined, and why they can be a difference.
That said, the lending work that is controlled largely by AMC’s seeks out the fastest and cheapest bidder for the appraisal.
Working fast and cheap, results in less due diligence, which takes billable time, less support or documentation for the value opinion rendered.
Fast and cheap is contrary to ever getting a good appraisal. Instead the industry concentrates on making appraisals Look Good, rather than doing Good Work.
All that said, low bidders are often lazy and sloppy. I hope this helps amplify the magnitude of the problem.
As for me, I used to be fast, but no longer want to be. I would rater not work under the ungodly time pressures lender work demands {residential and commercial}.
I would rather tell the client what our work queue is, how long it will take before we can inspect the property and how long after that before we could deliver a report. Meaning, weeks, not days from intake to delivery.
Great stuff Steve. I think that’s an especially solid point. Market value is not the highest price. What is the most probable price? If you lined up 100 qualified buyers, what would be a reasonable price for the property?
Just completed another 5+unit apartment in Sacramento. The reluctance of the parties involved to include any Income and expense data in the listing has become a concern. Calls to the parties involved is generally met with reluctance at best to get any information.
Just an observation.
Thanks David. Interesting. So maybe the parties are not being transparent in light of rents being low? I’m guessing we’ll hear lots of stories like this. We’ll still need time to see what the market as a whole does, but stories like this could add up and eventually be data points, and collectively they’ll start to tell us more about the bigger trend. Let’s keep watching. Please keep pitching in your two cents as you make observations.
Regarding “meet value,” never once in my 22+ years of originating loans have I said to an appraiser, “We need $X value”–even when s/he asked! In fact, I always thought it odd that the purchase contract must accompany the appraisal order. What difference does it make how much the buyer agreed to pay? The value is the value, regardless of the parties’ agreement. Now they have AVMs determining value–a recipe for disaster, in my opinion. Quicken Loans doesn’t even ALLOW appraisals for their Agency loans. Get ready…we’re headed back to 2006-2008.
Catherine, the appraiser under Uniform Standards of Professional Appraisal Practice is required to analyze any sale of the subject property in the last three years.
But at the time of the appraisal request, the subject property hasn’t sold yet, so how could the purchase agreement of the parties mean anything? Doesn’t make sense to me.
Thanks Catherine. I appreciate that you haven’t said that. I will say it was profoundly commonplace to hear stuff like that – especially around 2005.
Great information Ryan. We’re watching rent control here in Oregon as well.
Thanks Gary. And since you guys are head of us, I’m anxious to pour into some stats to see what sort of effect there has been.
Have a question our fha and appraisal case number was transferred to another lender cause we got a better rate . But also same day it all took place got a email for them to order one and the email saying congratulations your in U/W ? So im confused a little . Our last appraisal isnt even 120 days old . Still nothing from U/W and its been 2 weeks since this all took place.
Hi Angie. Thanks for the comment. It’s hard to say what’s going on here. This is where I’d defer to your loan officer to find out what’s happening. On one hand it sounds like you’re moving forward, but it also seems unclear. I wish I knew more, but I would definitely lean on your loan officer’s knowledge (make them earn their paycheck). I will say it’s a very busy season for appraisers, and I imagine it is for lenders and underwriters too. So that could play a part. Best wishes.
As always, great information Ryan. Thanks for all you do.
Thank you so much Rick.
The rent controls that passed in Sacramento are not particularly strict. I doubt it will have much if any impact on prices for apartments until we have had a drop in rental prices followed by a sharp increase in rental prices. Maybe someday….
Thanks Nathan. I appreciate your take. The market is to be determined. We’ll need to watch sentiment among buyers very closely, sales volume of units, inventory, and actual prices. I’ve heard stories of price reductions and cancellations. But do these stories reflect the market as a whole? That’s what we don’t know yet. Let’s keep watching.
Great post! I am also watching rent control in Salem Oregon Appraiser as well.
Thanks. Keep me posted with any insight since Oregon is ahead of us in California.