Appraisals lower than agreed price

[Tim The Enchanter]

$2,000 isn't a lot of money but it's almost 4% of a $54,000 sale price. Equivalent to $12,000 in a $325,000 sale price.

Thanks for translating the into California type numbers, George.

 

[residentialguy]

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?

The definition of market value has qualifications/conditions for the buyer/seller when seeking the most probable price of the property.

Fannie Mae, Freddie Mac and FHA use this definition:
Market value is the most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: (1) buyer and seller are typically motivated; (2) both parties are well informed or well advised, and each acting in what he considers his own best interest; (3) a reasonable time is allowed for exposure in the open market; (4) payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and (5) the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

 

[George Hatch]

I once did the reviews on 3 appraisal prepared for contract sales involving the first three sales of a new home subdivision. The pending sales prices were all in the $2mil range. The original appraiser hit the contract prices but the way he did it was by using custom built homes in superior appeal neighborhoods. These were not among the most similar sales data.

By the time I got done with those reviews and expressed my different opinion of value the developer was compelled to go back and renegotiate the prices of all three homes to match my review. Each of the three borrowers ended up saving about $300,000 apiece and those prices similarly affected all the sale prices in that subdivision from that point forward. My reviews probably ended up costing that developer a couple million dollars.

The original appraiser and the loan originator he was working for tried to contest my review but their data sucked compared to mine. It wasn't even close.

This was back just after the market peaked and was starting downhill. Even with the price reductions it still took the developer almost 18 months to sell all 25 units in that subdivision. They were definitely not underpriced at my valuations.

My point is that it's not extremely uncommon for sale prices to be changed to match appraised values - but nobody ever sees that. It's one reason many people think that appraisals always hit the contract price.

 

[George Hatch]

Repeat........

 

[Eric C]

This is true for obvious outliers, but I would argue that you can't be that close to ignore the subject contract data... You're just not that good and neither am I, or anybody else. You would have to really have extremely strong matched pairs - many of them. That is happened only once to me in it was a condo situation situation in a declining market, and I could find no justification at all for the upswing. It was off by exactly the seller concessions.

I agree with you...When Im that close to the contract price I do take into consideration the contract price in my reconciliation but it still has to be somewhat bracketed even if its by a pending sale....or being that its an investor sale I would expect that the subject property has at least been completely remodeled and possibly placing it at the higher end of the market.

 

[Terrel L. Shields]

• Is there a reason that appraisers would be giving under market valuations to properties

  No. But they do sometimes

  or is this just a matter of properties in this market being worth less that buyers/sellers think they are?

  frequently borrowers don't realize how much the market has fell.

• 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

  Appraisers were never supposed to have "close ties" to banks since FIRREA legislation in 1989.

• [*] 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?
  [*]

• AMC's are notorious for picking up right where Mortgage lenders left off... pressure the appraiser so the deal gets done...rush them on time, and cut their fee. You get what you pay for and the AMC's don't pay much.

• [*]
  [*]What is the consequence to the appraiser of giving too low or high a value to a property as determined by actual sales data?
  [*]

  We rave and rant here...but the state can step in and show the errant one the highway..

• [*]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.
  [*]

  We gladly accept your comps, but since you are likely to choose comps that support your own estimation then we cannot simply accept them as the only available data. So we still are going to look for the most recent, similar and proximate sales we can find...and that might not be the ones you picked. OTOH, if there is a house nearby that you know sold find out about it. If the interior was shot, the plumbing damaged, and the AC didn't work...tell the appraiser. Give them a reason to look at "better" (more similar to your) sales.

 

[residentialguy]

I agree with you...When I'm that close to the contract price I do take into consideration the contract price in my reconciliation but it still has to be somewhat bracketed even if its by a pending sale....or being that its an investor sale I would expect that the subject property has at least been completely remodeled and possibly placing it at the higher end of the market.

True, bracketing is nice and we don't know if there was or wasn't a higher priced house. Most likely there was, but even still, it is not necessary. Can you not appraise the nicest house?

Certainly not enough info to make any conclusions by anyone...I was just saying something similar to what you were saying (I think).

My guess is that many of these investor purchases were REOs and the appraisers just used other REOs as comps, thinking that since the subject was a REO sale, they should find the most probable price of a lender owned sale, instead of a sale defined as most probable price of the subject where there is not undue stimulus to sell. Just a hunch.

 

[NORTON]

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?
  
  Buyer's & sellers are not the only value experts...their agreed upon contract price may or may not reflect a supportable value. Say this 3 times out loud, Price doesn't determine value, Price doesn't determine value....
  
  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?
  
  They shouldn't although this questions seems to appear u are really asking why doesn't the appraisal match the contract price? See above.
  
  
  What is the consequence to the appraiser of giving too low or high a value to a property as determined by actual sales data?
  
  There are potential consequences although this doesn't mean that their opinion wasn't valid.
  
  
  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.
  
  In this particular situation, did the appraiser not utilize the best available data, or did the appraiser just utilize data u don't agree with even though it could be considered valid and reliable.

 

[Marty Boone]

Were there any seller concessions negotiated?

 

[J Grant]

You have received some excellent answers.
A key aspect to understanding the appraiser's role is that price does not equal value. As you know, you can buy things under predom market, or over. As an investor, you are always trying to buy under the market (Surely you realize some of the prices you pay are below market ), and most investors try to sell a bit over the market if they can. Whatever the situation, just because a buyer and seller had a meeting of the minds on price, our concern is to find the Market value of the property, which can be the same as sales price, above or below. In addition, concessions or special financing can affect price and an appraiser would adjust for that.

Imo, a seller meeting an appraiser at a property does nothing to change the value.I personally become annoyed at very "pushy" sellers, and no, handing an appraiser comps you think they should use does not change things either.

Best of luck in your ventures, and in this market, while there are still REO and short sales out there competing with your resales, you would be best off considering this will happen from time to time and be willing to re negotiate your contracts if it does happen.

As you see, buyers are willing to pay quite a bit more when it is not "their" money, I would imagine you buy your project houses all cash.