1st Time Homeseller; how to judge a bad appraisal?

[tarheel5]

We recently got an appraisal back that was significantly lower than our perceived "lowball" negotiated price of the home we are selling; (it was even way below tax value.) The buyer of the house is worried her FHA loan will be rejected based on the appraisal. We are not necessarily wanting to come down on the price unless we believe it is truly "fair market value". But, we are not sure how to judge the quality of the appraisal or appraiser for that matter.

The house is located on a small lake in a community that has premium lots on a boating lake and a golf course.

One issue, the appraiser did not walk the full extent of our property (which is only a third of an acre) and missed entirely a two-tiered, stone patio professionally constructed that provides access to the lake. She just walked a few feet from the house and took a picture of our view and admitted not seeing the large patio (which, due to a gradual incline, purposely does not obstruct the lakeview from the deck). Interestingly, the picture of our "view" was taken from the border of neighbor's adjoining property line and not directly from our yard, so it does not reveal any of our landscaping, which includes groomed trees and natural areas. Our house is oriented (back windows and deck) to look straight onto our property and not the neighbor's.

Also, is the "quality of view" taken into account in appraisals? She only listed "water view", "average", and "golf course." She gave us only a 10K credit (much less than the lot premium) over "average" views (houses that back up to other houses) and none over golf course lots (regardless of the actual view). Familiar with the comp homes, the views from those houses greatly vary and some are not in the best locations on the lake or golf course (limited views). There are parts of the lake in which you are really in an alley, and the breadth across the lake is 40 feet at most. Our particular lot has the most expansive view of the lake (which can even be shown by ariel photos). Plus, the orientation of the house takes advantage of this full view, unlike even our neighboring homes. Other real estate agents concur that only one other house on the lake might have a better view (given preference for seeing the clubhouse in its entirety.) When we were buying, we actually gave up a larger home for the better view.

Secondly, I am not sure how to judge this: I noticed she deducted over 10K from the value of our home based on "days on market" for homes currently still available in the comps. However, she did this for both homes that are on the market longer than ours AND shorter. Why would homes that have been on the market (much) longer than ours be worth over 10K more than our home? (Is this a missed plus versus minus mistake or common practice?) Also, we have actually had previous offers - one offer was actually higher than the current negotiated price that came in a few weeks after we put it up. My husband was a little more stubborn then about letting it go, and our situation has changed since then with a new baby on the way.

Thirdly, the appraisal did not have any adjustments for the type of foundation each house has. Our home has a crawl space, but some of the comp homes have slab foundations, which were a lot cheaper to build at the time. Also, these homes do not have hardwood floors or upgraded cabinets, which ours does. She gives no credit for these improvements over the comps. Is this usually standard? I thought these might be factors because I know the builder placed emphasis on these in the pricing. She gave homes with brick veneer $7500 credit, but foundations and other upgrades do not count? Again, I have some confusion.

I am not familiar with the appraisal process, so do not know what is common practice or not. I am not wanting to raise lots of issues with the appraisal ignorantly. Our agent told us that most buyers currently in our area are choosing FHA loans and that this appraisal will stick around for 6 months for any buyer trying to buy our house with a FHA loan. Is this true?

Trying to make a decision soon as to whether we come down in price to meet the appraisal or ask for a re-appraisal (if such can be done by the seller.) Thanks for any input!

 

[Webbed Feet]

Not all of your points are valid objections.

We recently got an appraisal back that was significantly lower than our perceived "lowball" negotiated price of the home we are selling; (it was even way below tax value.)

The tax assessors value opinion is irrelevant triva.

The buyer of the house is worried her FHA loan will be rejected based on the appraisal. We are not necessarily wanting to come down on the price unless we believe it is truly "fair market value". But, we are not sure how to judge the quality of the appraisal or appraiser for that matter.

Why concern yourself with judging the appraiser or the appraisal? The appraisal was done for the borrower's lender and loan underwriting. You have no reason to rely on it or use it as any basis of renegociating your contract price. If you do not want to follow through and sell to this buyer at a lower price, then don't.

<.................snip......................>

One issue, the appraiser did not walk the full extent of our property (which is only a third of an acre) and missed entirely a two-tiered, stone patio professionally constructed that provides access to the lake. She just walked a few feet from the house and took a picture of our view and admitted not seeing the large patio (which, due to a gradual incline, purposely does not obstruct the lakeview from the deck). Interestingly, the picture of our "view" was taken from the border of neighbor's adjoining property line and not directly from our yard, so it does not reveal any of our landscaping, which includes groomed trees and natural areas. Our house is oriented (back windows and deck) to look straight onto our property and not the neighbor's.

The location from where the appraiser took a photo is all beside the point. Was the appraiser there? Did the appraiser see the view? The appraiser is not held to a standard of being a professional photographer. The appraiser looked at your landscaping. It is the appraiser that arrives at an opinion of value of the property, not the photograph. I appreciate your feelings as I am very proud of my landscaping too. But you are placing entirely too much meaning on what photos the appraiser used. Yes, she should have slowed down and looked over just a third of an acre better. Personally, I would have walked down to the lake if that was as far as it was and you had all-weather paths to it.

Also, is the "quality of view" taken into account in appraisals? She only listed "water view", "average", and "golf course." She gave us only a 10K credit (much less than the lot premium) over "average" views (houses that back up to other houses) and none over golf course lots (regardless of the actual view). Familiar with the comp homes, the views from those houses greatly vary and some are not in the best locations on the lake or golf course (limited views). There are parts of the lake in which you are really in an alley, and the breadth across the lake is 40 feet at most. Our particular lot has the most expansive view of the lake (which can even be shown by ariel photos). Plus, the orientation of the house takes advantage of this full view, unlike even our neighboring homes. Other real estate agents concur that only one other house on the lake might have a better view (given preference for seeing the clubhouse in its entirety.) When we were buying, we actually gave up a larger home for the better view.

This is a tough one for everybody. One man's view is another man's dislike. The fact the general developer, and you, both deemed it a superior lot does not mean years later everyone else does. Other properties that have not sold recently being the only ones with similar views do not help a darn bit. The appraiser needs those to have been recent sales in order to extract out the market reaction to their views. It can't be done otherwise. So you are bringing up one of THE most subjective elements of real estate appraising. Not that this means that $10,000 adjustment is adequate. The real question is how did the appraiser justify any view adjustment of any kind at all? Any view adjustment, if zero meaning an utter lack of adjustment, $10,000, $30,000, or $5,000 should be justified somehow. Not just guessed at. But because it is very subjective it could be impossible to prove any certain adjustment is incorrect compared to another. Or the appraiser simply may not have had the skill to understand how to proxy the adjustment if needed.

Secondly, I am not sure how to judge this: I noticed she deducted over 10K from the value of our home based on "days on market" for homes currently still available in the comps. However, she did this for both homes that are on the market longer than ours AND shorter. Why would homes that have been on the market (much) longer than ours be worth over 10K more than our home? (Is this a missed plus versus minus mistake or common practice?) Also, we have actually had previous offers - one offer was actually higher than the current negotiated price that came in a few weeks after we put it up. My husband was a little more stubborn then about letting it go, and our situation has changed since then with a new baby on the way.

You must be speaking about active listings, not sales, of other properties in the area and the appraiser adjusting for market reaction to asking prices in the area. Simply put, asking prices are NOT the market value of those properties. If the appraiser deemed almost all listings are finally selling for a certain percentage below the asking prices she is adjusting those active listings to an expectation of a successful offer from a buyer based on market data. And yes, it is accepted and underwriters very often like to see that adjustment made.

Past offers on your property are not relevant, nor should be, to the appraiser. The goal is to use settled market data to arrive at a credible opinion of value. Not use what could of been offers that never finalized into anything agreed to by anyone. I apprecate why you brought it up, but as an appraiser I would not give such information any weight at all.

Thirdly, the appraisal did not have any adjustments for the type of foundation each house has. Our home has a crawl space, but some of the comp homes have slab foundations, which were a lot cheaper to build at the time. Also, these homes do not have hardwood floors or upgraded cabinets, which ours does. She gives no credit for these improvements over the comps. Is this usually standard? I thought these might be factors because I know the builder placed emphasis on these in the pricing. She gave homes with brick veneer $7500 credit, but foundations and other upgrades do not count? Again, I have some confusion.

You are speaking about "Quality of Construction." If you are not just recalling incorrect subjecture, but really have facts concerning those comparable, then get one of the Realtors to present the facts to the lender and the lender to the appraiser. The appraiser may have not gotten that deep into the interiors of the comps, not had the information available, or you could be incorrect about those comps. Either way, a good appraiser would reconsider if new information proved true. In a perfect world the comps should have matched up to the quality of yours. Sometimes the world is not perfect for appraisers and some appraiser's respond to that by working hard... some don't.

I am not familiar with the appraisal process, so do not know what is common practice or not. I am not wanting to raise lots of issues with the appraisal ignorantly. Our agent told us that most buyers currently in our area are choosing FHA loans and that this appraisal will stick around for 6 months for any buyer trying to buy our house with a FHA loan. Is this true?

Trying to make a decision soon as to whether we come down in price to meet the appraisal or ask for a re-appraisal (if such can be done by the seller.) Thanks for any input!

Yes, that is true about FHA and prior appraisals of a specific property. No, FHA is not going to consider an appraisal with a seller as the appraiser's client. You've brought up some of the most subjective, and difficult, aspects of residental real estate appraising I know of. I believe that other appraisers, and I, have heard property owners attempt to use these items to try and justify a higher value out of real estate appraisers literally millions of times. It's the old "We have the best in the neighborhood so our property should be worth more" claim. These results may very well be why purchasing the best in a neighborhood is not a wise choice as far as future results from real estate appraisers. Why landscaping better than anyone else is something you have to do for your own pleasure, not for expecting a return on your investment. Google "Regression and Progression" regarding real estate on what those concepts mean regarding one specific property and the affects of the surrounding properties on that one property to understand.

I would say your best shot is a very skilled real estate agent / broker presenting anything the appraiser may have missed in a reasonable manner to the appraiser.

 

[Workbox]

You some very good questions, I can not comment if they did or did not make the appropriate adjustments. I can tell you that you best bet is to hire your own appraiser and only tell them about the on-site facts, and do not tell them of any other appraiser coming over or that you have issues with the final opinion of value.

Now pending of where you might be in NC, there are some very excellent qualified appraisers that are active on this forum that might be able to assist you. Either with another appraisal or review appraisal.

But I will tell you about my own experience about certain thing that you mentioned. To start, I would put more emphasis on on-site improvement than on landscaping. You may love your rose, but the new buyer may mow them over. I have seen it done. So patios, storage, decks, docks, etc.

For foundation, I have come across markets where it does not matter how the foundation was either elevated or ground slab, but in flood hazard areas it would, but what mattered most in some markets was desirability of the location. It has also applied to brick or wood siding.

As for views of the lake, In my market I try to be very careful when it comes to water-views, or waterfront locations because I too and only speaking from my own market, I have seen market differences due an the kind of view or lot locations one has. Not every water location is equal.

As for time adjustment, some appraisers do them, some do not. But in my case I do study the list price and the times it has been dropped and what it finally sold for. And if it becomes noticeable with every other sale or current active listing, then those market conditions would help me in my analysis of adjustments if any and or final opinion of value.

But we have to be fair to the appraiser. Maybe they did do there homework and examined all aspects of the market and either it was full of sales or limited in sales, which both can have a considerable effect on market analysis and did do a proper report.

The market is changing and markets are softening or dropping drastically. I can not tell you what to do, that is why you hired a Realtor. But I will give you and example of what is happening in my market. I just recently recieved a refi for a property that I did 2 years ago and it appraised at $610k two years ago. Now, the resales are around $500-550k.

I hope this helps, best of luck.

I can also tel you that the market is what it is

 

[tarheel5]

Update

Our realtor just gave us the new value after confronting the appraiser about the patio. Our new appraised value is now at least close to our negotiated amount - falling only 5K under and placed a little more than tax value.

Her agent insists that her buyer still requires at least 5K toward closing even if we were to drop the sales price by 5K. I thought with FHA loans, any money toward closing from seller doesn't count? Is this customary?

 

[Walter Kirk]

Although the appraiser may have neglected to walk around your entire property the adjustments taken reflect the appraiser's judgement of the market reaction to your property not the cost of those features.

Your question about an adjustment based on "days on market" may be a time adjustment to reflect recent declines in overall sales prices in your area. The best way to judge the quality of the appraisal report is to get another appraiser to critique it.

By the way a homeowner seeking to sell a property with FHA financing may have their property appraised prior to listing, this is called a sponsor appraisal and is paid for by the seller.

 

[Mztk1]

You had three excellent responses. I just want to add:

FHA prefers an appraiser to use what is known as the bracketing method with the comparables. They want the appraiser to pull all of the best available sales that bracket the likely value, or living area, of a property, and place them in two piles - superior to the subject, and inferior to the subject - and choose at least three, with at least one sale from each pile, picking the most recent and similar. This way the appeal of the subject property is surrounded and the comps can be adjusted to narrow the likely market value of the subject property.

Adjustments made to the sales must be based on quantitative market approaches. This does not mean the data used for making the adjustment has to be in the report. It means any one of a number of quantitative market methods for determining a value has to be used.

For rural properties or for unique properties, an appraiser can make adjustments for the "typical buyer reaction". This adjustment, too, should be based on a market technique. Market techniques include statistical analysis, chart analysis, cost analysis, market extraction, paired sales analysis, as well as a review of secondary data (such as dated sales), input from knowledgable professionals in the area as a last resort, and maybe another one or two. All of this is found in the Appraisal Institute's Appraisal of Real Estate 12th edition as well as in guidelines. The appraiser does not have to explain an adjustment on the grid except if that adjustment is excessive (generally considered to be 10% or more by the industry), or if it is one of a few select amenities, such as a barn or an accessory unit. Aside from these exceptions, the appraiser does not have to prove an adjustment or show support for that adjustment in the report. Across the grid adjustments, or unexplained view adjustments are allowed. These reports are given to homeowners, but when you have an appraiser who does not explain every last detail, only a qualified appraiser can determine if the adjustments made are supported by any known market approach. Unfortunately, too many appraisers who do review, as well as an appraisal management company or two, do not realize the onus is on the reviewer to prove a mistake or to research and analyze the data in every possible way to find out if those adjustments are market based using one of the quantitative methods. Instead they say it is "unexplained" and say the report is not credible because the appraiser did not support her adjustment. That is wrong. Credible is defined as "worthy of belief" and supported by logic and evidence to the extent necessary for the intended use. The extent necessary for the intended use for a mortgage appraisal, FHA, Conventional, etc., is the extend required by their guidelines. Many homeowners and appraisers demand a report to be an academic appraisal, proving everything, or they say it is not credible. Wrong, wrong, wrong. They will say one that explains everything is more credible that one that doesn't. Also wrong! A report is either credible or it is not. If the guidelines were followed, reliable comps were chosen, and the adjustments are based on a market techique (even if unexplained), then a mortgage appraisal IS credible.

As for your last question, the money for closing comes out of the proceeds of the sale. That is why many times the sale price in markets where concessions are common will be higher than the asking price. If you are selling for $295,000 with $5,000 going back and the house appraised for $290,000, there is no place for that $5,000 to come from unless you drop your price to $290,000 and net $285,000.