Appraisals lower than agreed price

[investor]

Thanks for the interesting and detailed replies! I enjoyed the pros/cons and the reasoning expressed. I didn't mean to make this just about my particular property but the focus on it brought the general issues out quite well.


A little additional information:

• The property I sold was a row house in Philadelphia. The owner once removed from me (don't know how to express this better) had partially rehabbed the property (badly). By the time I was done the property had the following new items: kitchen, bath, floors, heating system and duct work, porch, walls and ceilings and was repainted throughout. The electrical system was upgraded and the roof repaired.
• This was my first property--I just finished my 3rd several months ago and am trying to sell it now--and I made many mistakes. This is not my full-time job though I'd like it to be. I haven't proved to myself that I can make a living doing this yet. I'm a software engineer for the last 20 years but was a painting contractor the 15 before that.
• The person who bought my property had an agreement to buy another property previously and the deal collapsed when the appraisal came in 15% below the agreed price. The appraiser was on firmer ground in this case in my opinion.
• I certainly understand that agreed price and market value are not necessarily going to coincide. On my second property the appraisal was significantly higher than the market value in my opinion. On the first place there were properties that bracketed the price of my house but I was definitely on the higher end in that area. I'm prejudiced of course, but in this particular case, given the condition of the property, the fact that this was certainly an arm's length transaction and comparable sales data, I don't think there was a strong enough case to come in below the agreed price.
• When doing rehabs the four important questions are: what is the property worth now, what kinds of repairs/upgrades are needed, what will these repairs cost and what will be the ARV (after repaired value) of the property. I hired an appraiser to help me out with a couple of properties I was looking at. It seems to me there's a business opportunity for appraisers working for investors to assist with these questions. One of the replies alluded to this. Do any of you work with investors in this way?

Best Regards to all.

:icon_mrgreen:

 

[George Hatch]

The definition of market value provided in the URAR begins like this: "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." So if you cannot specifically provide some reason as to why the conditions requisite to a fair sale were not present (REO, trust sale, distressed seller, special financing, etc etc) then how is the sales price not a strong indication of market value?? You could argue that the buyer or seller were not well-informed, but do you know that for sure? You must weigh that against the imperfect nature of the appraisal process, especially the scope of work used in a summary report.

In theory, any sales contract represents the meeting of the minds. That makes the subject's contract just as valid as any other sale. Within reason, it also makes all the other sale contracts just as valid as the subject. It's street with two directions of travel.

A single datapoint is a single datapoint. You can argue that the subject is always it's best comp but the datapoint is still just one comparable.

If you've got 10 sales saying one thing and one sale saying something different then what do you normally do? You'd probably give the outlier a bit less weight regardless of its other similarities.

In my opinion when the appraisal we're talking about comes in at a measley $2k under the contract price I would expect the appraiser to make a bulletproof case for proving the negative; i.e., why the subject cannot reasonably be valued for $2k more. In cutting it that thin he/she is asserting a pretty high degree of "accuracy" at which point the burden of proof is on them. In an inherently imperfect RE market that's quite a challenge.

Personally, I probably wouldn't have done it without a really good reason, expressed really clearly in the report so that there's no doubt to any reader how I came to such precision. If the appraiser in this case failed to make their case in the report then I would consider that a deficiency regardless of how well supported their value conclusion is in the market.

Given the margin in question and the eventual outcome of the deal I would guess that this appraisal report was reviewed by someone at the lender and they agreed with the conclusion. If so then that means the appraiser must have made their case because if there had been a problem the lender would have made the appraiser fix it.

 

[J Grant]

In theory, any sales contract represents the meeting of the minds. That makes the subject's contract just as valid as any other sale.

No, it is not as valid. Because the subject did not close yet. The contract price, credit worthiness of borrower etc has not yet consumated the deal, re, been tested by the market ( a borrower can be turned down for bad credit, the subject house found to have defects in inspection ,etc).

Within reason, it also makes all the other sale contracts just as valid as the subject.

A gray area. Because of the variances/ possible concessions/ special motivations beehind any closed sale, appraisers never rely on one sale, but on a number of sales, as well as listing and pending activity and market trends. The subject contract does hold some meaning, but part of our job is to decipher the meaning...analize the contract, and ultimately, with our MV, either prove or disprove the contract price as being the same as/equivalent to MV.

A single datapoint is a single datapoint. You can argue that the subject is always it's best comp but the datapoint is still just one comparable.

Agree with this.

If you've got 10 sales saying one thing and one sale saying something different then what do you normally do? You'd probably give the outlier a bit less weight regardless of its other similarities.

Agree with this.

In my opinion when the appraisal we're talking about comes in at a measley $2k under the contract price I would expect the appraiser to make a bulletproof case for proving the negative;

Since when did this become a standard of appraising, proving a negative against a contract?

i.e., why the subject cannot reasonably be valued for $2k more. In cutting it that thin ???

Sorry, I know you are writing on a BB and I too sometimed dash off statements I later want to revisit...think about what this implies. We are not supposed to appraise to a predtermined value, including the contract price. Therefore, comparing our value in this way to the contract price, with statements such as "it fell short by 2k, the value was so close, why did the appraiser cut it so thin ", all these kinds of statements imply that the appraiser was trying to make that contract price bur darn it, fell short by a measly 2k.

She/she is asserting a pretty high degree of "accuracy" at which point the burden of proof is on them.

Since when has this become an appraisal standard? That just because a MV is close to, but not the same as a contract price, it suddenly has to put the appraiser on the defensive, as if they have to prove why they did not arrive at the contract price? This becomes scarily close to violating the disinterested third party part of the certification.

A properly developed, credible and supported MV is what it is. If it is so close to the contract price that it frustrates people that is unfortunate, but that does not mean the appraiser suddenly becomes suspect for having developed an appraisal with a higher degree of accuracy...

In an inherently imperfect RE market that's quite a challenge.
Personally, I probably wouldn't have done it without a really good reason, expressed really clearly in the report so that there's no doubt to any reader how I came to such precision.

I find this problematic, that because the appraiser came close to the contract price, they are suddenly liable for being too precise? What does that imply, that appraisers should skip the scrutiny and just add the 2k in and make the deal work?

If the appraiser in this case failed to make their case

Why is an appraiser suddenly being made to make their case, because they came in below a contract price ( in a small amount). The appraiser's job is to develop a MV, not "make a case" for not coming in at contract price.

in the report then I would consider that a deficiency regardless of how well supported their value conclusion is in the market.

Why? Why is coming close to but below a contract price a deficiency, esp if the value is well supported?

Given the margin in question and the eventual outcome of the deal I would guess that this appraisal report was reviewed by someone at the lender and they agreed with the conclusion. If so then that means the appraiser must have made their case because if there had been a problem the lender would have made the appraiser fix it.

It is professional and good practice to write a concise explanation of why the contract price is above the appraised value. Beyond that, it is what it is. Let the parties to the deal professionally, after they recieve the report. Buyer, seller and agents have lots of options when an appraised value is below contract price. In any event, the appraiser is supposed to be a neutral third party, not an advocate for the deal, nor an adovcate for the contract price.

RE, being 2 k off a contract price is a significant amound dealing with a 52 k price home, and mostl likely means the appraiser found MV only supported at the high end of 50k. But coming within 2k off contract price on a 450k home is much less signficant spread, and there it is more likely an appraiser can see the amount as so small that to bring it up to contract price would likely be supportable by the comps in the report and market conditions (though one can never assume anything as each appraisal is unique to the property and area).

 

[residentialguy]

I don't need no stinking sales...I know what it's worth. I just put on the sales to show them that I'm right.

 

[Rich LeMond]

[FONT=&quot]I agree that we are here to tell the lender how the typical buyer would act, not just one buyer. So yes, if the contract price is simply unreasonable or not supported by a preponderance of the sales data, it is what it is. But having the contract price for the subject is basically the same as having a pending sale of an identical house right next door- aren’t you going to give it some serious consideration?

[/FONT]The buyers probably toured the inside of multiple competitive listings. They probably saw disclosures on many of these properties. They experienced the actual floorplan and livability of these different homes firsthand. Some sellers may be motivated, and some buyers may be desperate too, but you might never know this unless an agent wants you to. And these buyers and sellers, and their agents, entered into negotiations that you are not fully aware of. Did the agent report to you that the sellers agreed to a quick close, to make sure the new family could be moved in by the beginning of the school year? On the other hand, you got your comparable data from the MLS listing (one agents' rosy picture of the home), the tax assessor’s file (underfunded government agency), and a drive-by inspection (after the deal had already closed). If you were lucky, you might have inspected one of the comps for another appraisal, or you may have chatted with agents about some of the sales. And they may have told you everything, or they may not have. Either way, I’m sorry to burst your bubble, but there is a good chance that the buyers got a more complete picture of the competitive market than you did! But here you are telling the bank that the buyers have no idea what they are doing, and that they absolutely should have paid $2,000 less. And this is largely based on sales that have closed in the past, which is another big problem: our appraisal is relying primarily on closed sales data, but the typical buyer is mainly pricing homes in relation to the competitive listings. When you go to buy a new TV, are you looking at what other TVs have sold for in the past? No, you are pricing your best option. The sellers may have looked at a CMA when pricing, but the buyers may never have looked at, or ever thought about, a single one of your closed “comps”.

 

[Rich LeMond]

This is a fundamental problem. If you ( and others who use this argument that "appraisals are just an opinion, and appraisals are not perfect" statement )....if you think so little of your own profession, and so little of your own ability to develop a supported opinion of MV, then please stop appraising. Sell real estate, perhaps.

I do not think so little of my profession. But I am pretty saddened by people who think so much of the URAR Summary Appraisal. The typical scope of work and reporting that goes into this has largely been crammed down our throats by Fannie Mae, but over time it has somehow become the Holy Grail. Yes, Fannie Mae pays the bills. But, this appraisal format is pretty weak. I wonder how many appraisers have ever written a self-contained report for comparison? Or ever thought to themselves, how would I go about best supporting an opinion of value, without Fannie Mae there to hold my hand? In sum, J Grant, I think that the opinion derived through the typical scope of work for the URAR is very much imperfect, and it does not result in such a strongly supported opinion that you can't take into account the contract price of the subject as an important piece of market data.

 

[J Grant]

But having the contract price for the subject is basically the same as having a pending sale of an identical house right next door- aren’t you going to give it some serious consideration?

Rich, you make some good points in your posts, but... a few issues to explore. Yes, a buyer may have seen the inside of some of the closed comps and listings. But over the years, I , and other experienced appraisers, and perhaps you, have been inside thousands of homes, more than any buyer will. But that is a bit besides the point. If an offer based on looking at other closed sales/listing/ I am not there to tell the buyer their offer is "wrong", or bad, or unsupportable. I am telling my lender client that the offer (now a contract price), is not supportable according to the appraisal I was paid to develop, and the value is X. The buyer is still free to pay whatever they want, even though I said the value was X.

In other words, if the contract price was 155k and my appraisal was 150k, the buyer is still free to pay 155k, just take the other 5 k out of pocket. Isn't it funny though, that when it comes to spending more of their OWN money, it suddenly isn't worth it anymore and the buyer walks? In a strong or rising market, or for a very special house, buyers find that extra 5k to put down.

If they don't, they and seller can meet in middle and split the difference, all kinds of options out there (I used to be a realtor and if a good realtor keeps a deal together)

In any event, aka listings and pending, I always look at listings and pendings in coming to a value opinion and so do all good appraisers . And yes, in a rising market, usually listings are priced higher or getting full price offers, so they would support a buyer paying more. But in a rising or declining market, listings and pendings would not support a buyer paying more, so what do you do then?

While a contract price deserves serious consideration, because basically we would not be doing this partic appraisal if it did not occur, I don't look at it as another piece of market data. It is kind of in its own class, a pending event against which we develop our value and then check back in at the end of the appraisal with the contract price and see if it indeed was supported or not. I have happily appraised homes over contract price when the value is there, so I have no interest by any means in appraising a home lower. But when a home appraises out lower, I will once again check my work and the pendings etc to make sure I did not miss anything. But once I am clear that my MV truly is not supporting the sales contract, then that's that.

It is the realtors and lenders being so unprofessional about the whole thing that has made appraisers intimidated about sales contracts. The problem in emphasizing the sales contract is when one stars appraising to accomodate it. This starts to cloud some appraiser's judgement so much the appraisers don't realize they are now appraising around the sales contract price. Thus, if subject X had a sales contract of 190k, they will find a way to make it 190k. If the deal didn't work out and next week the subject had a contract for 200k, they'd change their adjustments and throw in a new higher comp and it would be 200k. If that sale fell apart and next week a contract came in at 180k, this same appraiser would find a lower sale and change their adjustments, and now the subject is 180k.

This is not even addressing the fact that some sales contract prices are not honestly arrived at and can include perks, concessions, etc, that is topic for another discussion.

 

[Terry Caldwell]

Investor, somewhere in your appraisal report there should be a definition of market value. The definition generally refers to buyers and sellers typically informed etc.

A single offer to purchase by itself does not define market value. While a contract price is important, and should be considered, it must by supported by the actions of typical buyers and sellers in the market place.