I'm sure this has come up before. I'm an investor in the Philadelphia, PA area. There are frequent posts on the message board of my local investor group--DIG-Diversified Real Estate Investor Group
http://digonline.org/--complaining about deals being killed by appraisals coming in below the agreed upon sale price. I had it happen to me last year. I had a signed agreement on a property for $54k and the appraisal came in at $52k. I could have walked away, appealed the appraisal, gotten a second appraisal, etc but did not because I was cash strapped and I wanted to get out from under the property.
My question regarding this situation:
- Is there a reason that appraisers would be giving under market valuations to properties or is this just a matter of properties in this market being worth less that buyers/sellers think they are?
- I am fairly new to the Real Estate domain so correct me if I am wrong but as I understand it legislation has been enacted to break the formerly close ties between appraisers and banks. The Appraisal Management Companies have been created to prevent the banks from directly choosing/having undue influence on the appaisers that they employ, correct? In this environment, why would an appraiser have a reason to give a value any different than what they actually believe it to be?
- What is the consequence to the appraiser of giving too low or high a value to a property as determined by actual sales data?
- I have read that the best way to get a fair appraisal is to meet the appraiser at the property being appraised and provide what you believe to be reasonable comps. Do you agree? Please provide any other advice you could give in this regard.
Thanks in advance for replies.
First thing first - the primary "reform" element that has occurred is the isolation of the appraisers from the loan origination side of the mortgage business. In the past it was real common for appraisers to work for mortgage brokers and other loan origination employees or departments - that has been outlawed, although some loan originators still find ways to assert influence on appraisers.
Lending institutions have always hired appraisers to work for them directly and have also engaged outside appraisers on a per-assignment basis. At these lending institutions the federal banking regulations have long required firewalls between the production side of the mortgage business and the appraisal side, which is really part of the due diligence process used to underwrite lending decisions. In this respect the usage of appraisals is intended to qualify the value of the property for the proposed mortgage, similar to how credit reports, employment verification, etc are used to qualify the borrower.
Anyways, many of the lenders have contracted with these appraisal management companies to fill that firewall role. It's not the only way to avoid the potential conflict of interests between loan production and appraising but many lenders have decided it is the most profitable and expedient way to do it.
I have no familiarity with your market area or your property or your situation beyond the one side you're presenting, the details of which I assume to be completely accurate as depicted.
The way I read your situation it looks like you might have had a resale of a property you had previously purchased, with a signed contract for the $54k. The appraisal came back at $52k, which in turn apparently caused all sorts of havoc. It looks like the way this got resolved was by you adjusting your contract price and eating the $2,000 difference between the contract price and the appraised value.
One of your questions relates to the relevance in an appraisal of a pending contract for sale. Appraisers are required to analyze such contracts as part of the appraisal assignment, They are also required to analyze the property's sales history. For example, if as an investor you purchased the property within the 3-year period preceding this more recent appraisal the appraiser would have had to disclose that prior sale and analyze it to the extent of understanding what that sale involved. If it involved a foreclosure resale or a rehab situation or a bulk purchase portfolio these are all elements that could have been of effect on the prior sale price and which might explain part of any differences between the previous sale and the more recent sale.
It pains me greatly to be compelled to admit that there are lazy appraisers out there who will invariably take the path of least resistance. But if you think about it, the path of least resistance in this case would be to use a pending sales contract as a target under the assumption that all the parties involved will be content so long as they get what they want. Stretching a value to hit a predetermined target reduces the appraiser's hassle factor when compared to bringing any differences of opinion to a lender that might sink a deal - that usually triggers some protests and extra reviews and additional requests for explanations and second opinions and such. Trust me when I tell you this hassle factor really is a hassle.
But, it's also part of the job description and is sometimes a very necessary process to resolve the question of whether the appraiser did the right thing or if they're causing problems for the lender and the lender's borrower and others.
Most conscientious appraisers will treat a pending contract price at $54k as being equal in relevance to their other comparable sales data, and sometimes a little more relevant under the idea that the subject is it's own best comparable. However, it's still only one datapoint. There's a very common attitude among appraisers that no one sale will make or break a value analysis because what we're looking for is the "most probable" value; the central trend, not the exception to the trend.
As I say, I know nothing about your situation beyond what you have described. However, if I had to guess I'd imagine that an appraised value that came in a measly $2,000 under a pending contract price would automatically be subject to additional review, probably by another appraiser. The original appraiser who turned this report in would have to know that missing by just a little will bring all their analysis under additional scrutiny. That's because even just a small mistake or difference of opinion about the subject or the comparable sales data could explain the $2,000 gap - and everyone would want to avoid "killing" a deal over such a mistake.
That's obviously not the only way it could have happened. Maybe the appraiser didn't do a good job with picking their comparable sales data or analyzing them. Maybe even after stretching and giving your property every benefit of the doubt the $52k was the absolute closest the appraiser could get to your contract price and your borrower was lucky to even get that close. Maybe the lender is being tight with their lending criteria or maybe they are (illegally) pressuring the appraiser to slant their appraisals toward more conservative valuations. It may be any of these or it may be none of these.
As I say, the small dollar amount involved triggers some curiosity, leading me to favor the idea that the appraiser was unable to document a higher value opinion because of the pricing of the "most comparable" sales data used in the appraisal. Maybe they are in error, but then again maybe they aren't. I wouldn't make any assumptions either way.
As for incompetent appraisal practice, licensed appraisers have to answer to their state appraisal boards for such allegations. a state board acting on a complaint of negligence or fraud or incompetence will investigate the particulars of the situation, including the appraisal report and the appraiser's workfile with all the data they used. If the appraisal board finds the grounds to do so the appraiser can be disciplined - depending on the state's rules and regs that discipline can take several forms, from verbal warnings to fines to license suspensions or revocations for the worst offenders.
If you have the information in hand that it takes to demonstrate a significant deficiency that would have resulted in an unreasonable valuation then it might be worth your while to submit a complaint to the state appraisal board. You will most likely need a lot more than just a signed sales contract, because as I said before that is just one datapoint. If you have 2 or 3 or 5 closed sales data that are at least as similar as the sales used in the appraisal report and which indicate to a higher value then you might have something. But I must warn you, if they aren't at least as similar as the appraiser's comps then you would probably be wasting your time. Proximate location, real recent to the appraisal date, closed sales (not listings or offers), similar ages, similar sizes, similar lots, etc. Simply picking alternate sales data by price - which is something realty agents and other laypersons commonly do when complaining about appraisals - isn't going to cut it. As well, simply being aware that the appraiser is from out-of-town doesn't cut it because most appraisers I know cover several counties - hardly any appraisers generate enough local business to limit their appraisal activity to just one town.
Likewise, complaining about a minor error in living area calculation or getting the year built of the home wrong or other typos that wouldn't result in big changes to the comparison probably wouldn't do much for you either. You would need to identify some significant errors.
Regardless of what you find when you look at the report and other data in the market I hope the above explanation is helpful.
