Distance/Town Vs. Home Size/Style

[ruggles]

I was planning to close on a home last Friday until the bank rejected the appraisal because the comps were too far from the subject house and too old (they were between 1 and 6 months). The bank asked the appraiser for an update and wanted homes ideally within 1 mile and sold in the past 3 months.

The town is approx 30 square miles and located in New Jersey. The 3 comps that were originally used were 4-7 miles away but all in that same municipality. They were all similar homes in size, acreage and style--its a 100 year old 4 bed 1.5 bath colonial on 1.5 acres--very good choices. When the appraiser updated the report, they added a home similar in size but smaller in acreage and different in style (a ranch not a colonial) that had sold recently and was about 2 miles away plus another active listing of a similar house about 2 miles away with less land.

The subject house is located in a corner of the town and is actually closer to homes in 2 adjoining towns--1 of which is the wealthiest town in the county. We have been through the MLS and have found 9 houses within 2 miles of the subject property that have sold since 1/1/2008. 2 are in the same town, 1 is in that wealthy town, and 6 are in the other adjoining town. The value of our house (what we're paying and the appraisal) is mid $300s. The sold prices of these 9 recent sales are from $300k to $900k--most over $500k.

The issue is that its a fairly wealthy area so its hard to find smaller houses like the one I'm buying anymore--most have been doubled or tripled in size and many have large lots so there are fewer homes. Plus the bad market has dropped the number of sales.

My question is--do appraisers always have to look for similar houses in the same town as comps or are other criteria just as valid? Once the bank specified that they wanted closer comps, would it have been better to add the big neighboring houses which recently sold and comp down from them? Or at least include explanation of the immediate neighborhood. We have sent these closer homes to the appraiser and the mortgage broker but none of them ended up in the appraisal. (also, if it matters, we're putting 20% down so there is some extra cushion in case the market and value drops further). thanks for any insight! Hopefully we'll get the green light to close even with the appraisal as is.

 

[Mike Kennedy]

XI, 403.01: Location (06/30/02)
We will purchase or securitize mortgages that are secured by residential properties in urban, suburban, or rural areas. An “urban” location relates to a city, a “suburban” location relates to the area adjacent to a city, and a “rural” location relates to the country or anything beyond the suburban area. We do not designate certain areas as being acceptable or unacceptable. To be eligible for purchase or securitization, a mortgage must be secured by a property that is residential in nature—based on the characteristics of the subject property, zoning, and the present land use. We do not purchase or securitize mortgages on agricultural-type properties (such as farms, orchards, or ranches), on undeveloped land, or on land development-type properties.
The appraiser and the lender’s underwriter must be sensitive to the varying conditions that characterize different types of locations. The appraiser also must consider the present or anticipated use of any adjoining property that may adversely affect the value or marketability of the subject property. Conditions that are typical of certain types of locations may not be present in other locales. This does not mean that the conditions are unacceptable, rather that they must be viewed in context with the nature of the area in which the security property is located. A few examples to illustrate this are shown below:
•If the subject property is located in a rural area that is relatively undeveloped or one in which properties often have large lot sizes, the appraiser may have to go a considerable distance to find properties that can be used to develop an opinion of value for the subject property.
•If the subject property is located in a suburban or urban area, the appraiser will most likely use comparable properties in the immediate vicinity of the property since suburban and urban areas are usually more highly developed and comparable sales typically are available in the subject neighborhood. However, if the property is located in an area in which there is a shortage of recent truly comparable sales—either because of the nature of the improvements of the subject property or the relatively low number of sales transactions in the neighborhood—the appraiser might need to analyze and use as comparable sales properties that are not truly comparable to the subject property. This is acceptable as long as the appraiser adequately documents his or her analysis in the appraisal report and explains why such comparables are being used.

 

[Mike Kennedy]

XI, 406.02: Selection of Comparable Sales (06/30/02)
We require an appraiser to research, analyze, and consider influences that may affect value based on market evidence (such as closed sales, contract sales, and properties for sale in the market area; market studies; etc.). For example, if a property is located in a neighborhood that includes (or is close to) an airport or hazardous waste site or that has relatively high property taxes or vacant or boarded-up properties, we expect the appraiser to research, analyze and use comparable sales from the same neighborhood or affected area (whenever possible) in his or her analysis. This will ensure that any effect of these value-influencing characteristics is taken into consideration in the development of the opinion of value for the property.
If a property is located in an area in which there is a shortage of truly comparable sales—either because of the nature of the property improvements or the relatively low number of sales transactions in the neighborhood—the appraiser might need to use as comparable sales properties that are not truly comparable to the subject property or properties that are located in competing neighborhoods. In some situations, sales of properties that are not truly comparable or sales of properties that are located in competing neighborhoods may simply be the best comparables available and the most appropriate for the appraiser’s analysis. The use of such comparables is acceptable as long as the appraiser adequately documents his or her analysis and explains why these comparable sales were used (including a discussion of how a competing neighborhood is comparable to the subject neighborhood).
The appraiser must report a minimum of three comparable sales as part of the sales comparison approach to value. The appraiser may submit more than three comparable sales to support his or her opinion of market value, as long as at least three are actual settled or closed sales. Generally, the appraiser should use comparable sales that have been settled or closed within the last 12 months. However, the appraiser may use older comparable sales if he or she believes that it is appropriate, and selects comparable sales that are the best indicators of value for the subject property. The appraiser must comment on the reasons for using any comparable sales that are more than six months old. For example, if the subject property is located in a rural area that has minimal sales activity, the appraiser may not be able to locate three truly comparable sales that sold in the last 12 months. In this case, the appraiser may use older comparable sales as long as he or she explains why they are being used.

** The two Fannie Mae Guidelines above explain the customary, acceptable, methods which address your question. On Vintage 100+ year old props, it is entirely acceptable, and often necessary, to vary from the standard 1 mile, 6 month Guideline - comparing "apples to apples" is essential - arbitrary time / distance guidelines are just that. Properly documented explanations of variance is required; utilizing sales, active listed props, contracted sales of SIMILAR vintage properties is essential - WHEN they exist. The Appraiser does not MAKE the market - he/she identifies it and is tasked with utilizing the MOST similar value indicators. Is it acceptable to use similar vintage props in adjacent towns with similar market dynamics - yes, especially if located in the subjects' school district (often the case). Is is acceptable to utilize similar vintage props more than 1 mile distant - yes, when necessary. Is it also important to utilize the most proximate POSSIBLY competitive, most recent sales - yes. Vintage properties often fall into a unique market Segment re property retention rates, marketing times, etc.......which is NOT impacted by "cookie cutter" 1 mile and 6-12 month time factors. The specific market dynamics for a 100+ year old Vintage property MUST be explained in detail in the report. Suggest, if that was done - and the Lender still balks........and insists on non-binding, arbitrary, time or distance parameters.......... find a local Lender that KNOWS better.

 

[George Hatch]

Of all the variables there are, the one that appraisers usually try to avoid the most is location. The other sales may be more proximate, but may be less similar in terms of location influences by virtue of being in a different township.

From your description, it sounds like the assignment involves a property that is atypical for its immediate neighborhood. The appraiser probably would have been ecstatic had they been able to find closer and more recent comparables, but (based on what you're saying) there apparently aren't any in your township - the ones used in the appraisal were the best the appraiser could do.

Assuming that's the case, that's a situation that should have been very clearly communicated all through the appraisal report. The Appraiser's Certification that appears in those reports includes the following assertion:

7. I have selected and used comparable sales that are locationally, physically, and functionally the most similar to the property.

It doesn't say anything about 1 mile and 3 months. However, appraisers know that in the current market climate the use of sales that are outside the immediate neighborhood or which are dated will invariably draw a lot of attention from reviewers and underwriters. That's because one of the indicators of an overvaluation is the use of sales data that are distant and/or dated instead of sales that are close and recent.

Offhand, this sounds like it might either be a problem with the way the report was written or the way that the report was read.

 

[Mztk1]

It is my experience, having appraised New Jersey, that the biggest driving force from town to town is school district. Here in the south, oddly enough, we don't care so much so it was a hard adjustment when I moved to Florida. But I grew up in a town in Jersey and the house directly across the street, a similar 225 year old colonial, was worth $175,000 while our house was worth $400,000 all because our house was in the township which had the better school district. If someone appraised our house using the borough's houses, that would not have worked out too well.

 

[Walter Kirk]

As a New Jersey appraiser I agree with the comment about the school district being a very important factor. From your description of the lender's requirements it seems that they are unreasonable. It is very difficult to find comps within one mile and within three months in suburban and rural N.J. If I were you I would look for another lender

 

[ruggles]

Thanks all for the info. Very helpful and interesting. --The issue is definitely a difficult lender with unreasonable expectations (have seen them trashed on this forum and some mort broker forums). Our mortgage broker made sure the bank got all of the actives/pendings and solds within 3 miles regardless of township since 1/1/2008. And the bank is apparently sending someone out to verify the neighborhood. I guess this is the new lending marketplace. Anyway, the appraiser's report was perfectly acceptable in my eyes--she included everything in the township (and same school district) that was as similar and as recent as possible and maybe a year ago that would have been fine.

There just was no explanation of the immediate neighborhood (within 1 mile) indicating why there were no comps, or a list of the much more expensive houses sold, or how the house is close to two other towns, etc. And I thought that providing that argument in the appraisal would have solved the issue. But then again, maybe not. thanks again!

 

[ruggles]

Just want to clarify that the appraisal did include mention of the large parcels of open land around the house limiting the number of homes/comps available and that after an exhaustive search of the public records, the comps listed were the closest and best. So there is explanation of the immediate neighborhood. Just not of the types of homes and what they sell for in the immediate neighborhood (even if they aren't comps). thanks

 

[RSW]

Just want to clarify that the appraisal did include mention of the large parcels of open land around the house limiting the number of homes/comps available and that after an exhaustive search of the public records, the comps listed were the closest and best. So there is explanation of the immediate neighborhood. Just not of the types of homes and what they sell for in the immediate neighborhood (even if they aren't comps). thanks

If you will look on page one of the URAR under the neighborhood section, you will find the information your are talking about. You can also find information about the active listings and closed sales on page two above the sales comparison grid in the appraisal report. These listings and sales are supposed to be comparable properties when compared to the subject property.

It sounds like the appraiser could only work with what was available at the time he visited the subject property.

Lenders are requesting appraisers to only use sales that have sold within 90 days and want them within one mile of the subject due to the unstable market. This is a limited scope of work for an appraiser to work with and may not result in an accurate opinion of market value. Active listings are often requested by the lender. This is to help determine if there is a declining market in your market area. This is considered to be the principal of substitution. One would not pay more for a property similar to the subject that what one is currently listed for. For example: Say your property was appraised for $300K and the highest listing was $275K. The listing is very similar to your property, similar lot size, quality, everything. Why would someone be willing to pay $300K when they can get a similar property for $275K or less?

I hope these comments are helpful to you.

 

[ruggles]

follow up

thanks all for the great information. We went to a second lender who got a copy of the original appraisal but then did a drive by appraisal (that is, they got someone to look in a database for recent sales). and came up with comps-- all in a different town but with the same zip code. with these comps they valued the house at exactly 10% less than we were paying for it. which sounds to me like they were looking for a number to reduce their exposure.

And I have heard from other real estate agents that these zip code appraisals (instead of by town/ distance) are becoming popular. Unfortunately, they are ridiculous--the zip code I just moved out of had one of the poorest towns in NJ in it (where you can get a single family for $120k) plus 5 middle class towns where prices are minimum 200k to 800k. so you can come up with almost any value you want.

Instead of fighting it, we put the extra 10% down--30% total--and moved in. we know the house is worth more than we're paying for it.

A very similar house, 2 miles away--same age and size but with 1 less bathroom, 1/2 an acre less land, and a much busier road (it feeds into the highway) just listed last week for $100k more than we just paid. i wish them luck. thanks again.