Solution to contract dilema

[J Grant]

There is no need to solve. We are all biased period. How do you get that bias? Well, if I know what the taxes are, I know how much the assessor thinks its worth. If I know what the contract says, I have another indicator. If I know what the place sold for, last time it is sold (which once was considered a "fourth" method of appraisal) then I have another indicator. And prior listings, current listings, etc.

Addressed in above post about the difference between bias and appraising with an agenda.


So if all that data is consistent and I have a contract in hand that is consistent with those other indicators.....hmmm. What is the price MOST LIKELY that this property is going to sell for? It's the contract price.

Too simplistic, sorry, though it can be that simple for some properties.

If our own indicators (3 + Sales, Cost, Income) are run thru the simple exercise of running the average/std. deviation ... you have a perfectly fine mathematical method of developing a "range" of value and in such, you find the contract fits...then it should be the MV of the property.

A range of value is not just a mathematical method, though math might be used for certain aspects of report, the range and value opinion is a culmination of all the research done, and relies on market analysis and appraisers judgment of quality of subject compared with comps.

As I have asked so many times. If you value something at $100,000 and the contract said $104,000; then the property closes at $104,000....do you ever use that property as an arm's length comparable sale? AND if you do, do you adjust it DOWN because you thought it sold "too high"...I wanna see the UW comments when you do that.

If I appraised a home for a MV of 100k when the SC price was 104k, and then I find out later that the buyer put in 4k cash and it closed at 104k, I am very likely going to rely on the 104k sale and not adjust it "down", (providing market was stable to rising). The fact is, when I appraised it a few weeks prior at 100k, that was the best credible value I could find. The fact that a buyer put more cash down of own funds makes it a new MV indicator (just as if for some reason it sold for 96k). Market value is every changing, as we know.

However, only an elapse of time and accumulation of additional sales will show if the buyer who purchased for 104k overpaid or not. If subsequent sales are 105k and 103k and 110k in coming months, then they did not over pay. However, if subsequent sales in coming months are 97k and 98k and 94k, then the 104k purchase buyer did over pay.

The appraiser has to judge market direction and quality of subject in relation to comps and use the best data they have at the time of report.

 

[23Degrees]

As I have asked so many times. If you value something at $100,000 and the contract said $104,000; then the property closes at $104,000....do you ever use that property as an arm's length comparable sale? AND if you do, do you adjust it DOWN because you thought it sold "too high"...I wanna see the UW comments when you do that.

If all indicators showed 100K and then an informed buyer, presumably aware of the appraisal at 100K, plopped down an additional 4K of their own money to consummate the premium paid for the property then that shows a market at work far more than an appraiser caving to the 104K contract and allowing for a leveraged offer to go through. So the answer is yes I'd use it without any downward "too high" adjustment and I'd find it a robust indicator of an increasing market.

Buyers should move the market upward with their own green - not appraisers cow towing to leveraged offers written on a contract that is reliant on the appraiser signing off on it.

Too many hinky 80% plus LTV's on top of the market purchases out there to think that this is not a problem.

 

[Terrel L. Shields]

appraised a home for a MV of 100k when the SC price was 104k, and then I find out later that the buyer put in 4k cash and it closed at 104k,

So if MV is supposed to be CASH equivalent but instead you are saying CASH needs to be equivalent to financing??? poor dumb me

 

[J Grant]

So if MV is supposed to be CASH equivalent but instead you are saying CASH needs to be equivalent to financing??? poor dumb me

??

You were the one who gave this example, a house we appraised at 100k, that soon afterward closed at 104k (contract price). Usually, when this happens, the buyer put in another 4k to close the gap between SC and appraised value, so we were commenting using this assumption.

However, seller could have extended borrower a 2nd mortgage for 4k, or perhaps the borrower went to a different lender, and their appraiser brought it in at 104k?. How it went from being appraised below SC price to closing at 104 k you didn't make clear, we assumed the buyer put in 4 k more which is usually what happens (in my experience at least.)

Since you designed this example, how did the home , which had a SC price of 104k, we appraised it at 100k, and it closed shortly thereafter for 104k, what facilitated it to close at 104k?

 

[Terrel L. Shields]

If the buyer put in $4K, then the property was financed by a loan plus cash...which is exactly what the contract was saying in the first place. When do you see a 100% financed sale in the first place now?

SO the MV of the property was $104,000. YOU appraised it for LESS based on what? You were either WRONG and mis-appraised it OR, you were right and they paid TOO MUCH. IF they paid too much, then to use it as a comp, you should be taking that $4000 OFF the sales price as some sort of ill-concieved "concession"..(which, of course, isn't a concession it is CASH..) So my conclusion is that you underappraised the property by $4000. Otherwise, you cannot reconcile using a comp at $104,000 that you just appraised for $100,000. One way or the other has to be wrong.

 

[J Grant]

Oy veh, T, u taxing me brain tonight! I can miss the mark on MV, as we all can. But, I am going to assume I did a good job and appraised it for best most credible value that the market data showed at eff date.

Back up a few steps.

On X eff date, I had a home with a SC price of 104k. I appraise it for a MV of 100k. If I do that, there is going to be a reason. I would not randomly appraise a house 4k below SC for no reason, or do it just to prove I am not hitting value.

So, I had my reasons for coming in at 100k. Possible reasons as examples: The subject was rather inferior compared to many of the comps. I used the best I could find, and of 4 comps, the house most like my subject in size and condition sold for 95k, a house a bit larger than subject sold for 100k, and then 2 better condition and larger comps sold for 102k and 105k. Being that my house was most like the 95k comp, and then next most like the 100k comp, and the 102k and 103k sales comps when adjusted for size or condition, came out to 100k and 99k, where is the support for valuing it above 100k? There were no higher similar pending's at the time either, and values were flat/stable. I did consider contract as an indicator, along with a moderate tightening of inventory, which led to reconciling at 100k and not 95k or 98k.

So, now, 3 weeks later, I am appraising another similar size house in area, and see that this home which I recently appraised at 100k, sold and closed for 104k. I call RE agent, yes, buyer put in 4k down to close the gap because they liked the house.

Will I use this recent sale for 104k as a comp? Very likely. The question is, how much weight would I put on it. That would depend on a number of things. Any change in market conditions since that sale?? Any change in interest rates? Any new pending contracts? Any more REO or short sales come on the market? Any other new closings? And so on. Again, I would use the best data I have at this time, 3 weeks later and decide how much to weight this very recent sale in my reconciliation.

Could I have been wrong, and under appraised it? OF course that's possible. However, I cant' tell whether this is the case just because it closed 3 weeks later for 104k. That just means the buyer liked it enough to put more cash down. I do take that into account as a market indicator, however, does it indicate I under appraised it? Impossible to know at that point.

The only way to see whether I under appraised it, of if the buyer overpaid, would be to track market activity over the next 3-6 months out around subject.

If the subsequent sales of similar size/condition homes nest 3-6 months out were 105k, 106k, 102k and 104k , then yes, I under appraised the home.

However, if the subsequent sales in next 3-6 months of similar size/condition homes for next 3-6 months are 99k, 97k, 96k, and 100k, then I did not under appraise it, and the buyer overpaid.

We can track values over time and look at our reports and see how close to "right" we were in our Market value opinions depending what happens after an eff date in the market.

 

[sputnam]

I think a better solution is to have appraisers that are properly trained and mentored...and who have the character and cojones to not bow to even the subtle pressure that a purchase agreement brings.

 

[Terrel L. Shields]

While there is nothing subtle about a contract, it is still part of the evidence of a sale price and/or future "Market Value" transaction. By knowing this FACT about the property, we have some obligation to NOT ignore it...IMNSHO. OTOH, no one suggests that it is good appraisal practice to seek sales that will justify a given price. The sales should represent the most recent, proximate, and similar properties. But if there is some ambiguity in the range of value (Say 3 identical cookie cutter houses sold for $96,000, $102,000 and $108,000 and your contract is $104,000 ...OK, the average is $102,000...but the deviation is $6000. Statiscially, the sale price would lie well within the statitical deviation. So you have to make some judgment as to whether or not the subject is somehow more similar to the lower end than the higher end. To arbitrarily say, I will go with the average ($102,000) with a $104,000 contract staring yoiu in the face is to say you are capable of a precision of measurement that is not borne out by your data.

Does it "bias" you? Of course! You are involved in a heuristic exercise that requires a bias (judgment). The idea that we have no bias reduces the appraisal correlation and reconciliation process to a mechanical exercise.

 

[J Grant]

Sputnam, ideally, I'd agree...but seems only a certain % out there fit the bill.

Terrel...did you read my posts about the difference between bias and an agenda?

I agree with your post 28, bias can be dealt with, and some of it is present in every assignment. However, an appraiser can have an agenda to make a deal work, aka hit SC price (or bring a refi in at highest possible $), that is irrespective of bias.

Right now, there is nothing to stop an appraiser with an agenda from using a SC price as target, and in fact, it's done routinely by my estimate aprox half of appraisers. I take it you have not reviewed res RE lending purpose reports, because then you would realize how widespread it is. And, if you think maybe the reports selected for review are the "bad" ones, so I have a jaundiced view, I am also offered many an appraisal by a HO they had recently done, that shows the same thing, a report designed around meeting a SC amount or providing a ridiculous high refi value.

It is far more widespread than you seem to realize.

My suggestion of withholding a SC price from appraisers till they develop a market supported value opinion which is seen by client and recorded, then supply appraiser the SC price and contract to consider in reconciliation and use to adjust their MV to if they feel supported, would go a long way of eliminating problem,, yet still allow appraisers to consider the SC price and analyze contract.

 

[Peter LeQuire]

My suggestion of withholding a SC price from appraisers till they develop a market supported value opinion which is seen by client and recorded, then supply appraiser the SC price and contract to consider in reconciliation and use to adjust their MV to if they feel supported, would go a long way of eliminating problem,, yet still allow appraisers to consider the SC price and analyze contract.

So, we would task an appraisal to develop an appraisal using the best market data available, and delivering an appraisal that expresses her opinion of what the best market data available supports the value expressed. Then, we say, "OK, now here's another piece of data we think you ought to look at - get back with us when you consider whether the best market data availble you relied upon is still the best market data."

Given the reality of the loan production market, I cannot imagine the time constraints this would put appraisers under to reconsider their original appraisal and report the result.

Given the reality of the business model we operate in, have operated in for decades and will be operating in for the foreseeable future, this looks like a severe case of scope leap that makes the scope creep we're constantly deluged with appear totally insignificant.

We continue to froth about the "accuracy" of appraisals; about bias in appraisers; about pressure on appraisers. We continue to treat the minor symptoms of the problem rather than its source. It's not about whether an appraiser is unduly influenced by knowing the "needed" transaction amount.

It's about failure to recognize the nature of an appraisal of a residential property intended for owner occupancy - by its very nature, it can never be "accurate" because of the subjective component of the house buying decision and because of the nature of the information sources available. It's about the refusal of the users of loan-related appraisals to accpept the fact that a range of value is the more appropriate way to report that value, and to accept the fact that prudent loan underwriting requires acknowledgment of that fact. It's about the refusal of enforecment agencies to enforce the long-existing statutes concerning fraud and misrepresentation for decades, claiming that loan-related fraud was not a significant problem. It's about loan production management giving a wink and a nod to compliance, while the entire system rewards volume at virtually every level. It's about government licensing changing the bias of users who historically tended to use the more experienced, more credentialed, better trained appraisers to an atmosphere of indifference toward credentials - if licensed = qualified, why bother with professional training and advancement?

There's more, but my fingers are tired.