Square Footage Valuation and other questions on low appraisal

[Beckles]

We're buying a new house and just received the appraisal and were unpleasantly surprised how low it was. I immediately identified that one of the comparables the appraiser used was flat out wrong, they had an active listing as a comparable that is listed at $190k in the appraisal, but is actually listed for $498k (the other four comparables and our house are all $430k and above for comparison). It appears the appraiser completely messed that up.


Given that significant error, I'm really questioning the thoroughness and accuracy of the rest of the appraisal. A couple of other things jump out at me, one is adjustment for GLA differences, they are valuing it at $18 per square foot, so our house is $9,000 more valuable than a comparable with 500 less square feet. Given that the sale price/GLA of the comparables is $106 to $162, that seems low to me.


Aside from the square footage, and this I'm just not sure about, they did not adjust for different numbers of bedrooms, so my question is whether it's reasonable that a 3500 square foot house with 5 bedrooms has the same value as a similar 3500 square foot house with 4 bedrooms, I always thought bedrooms added value.



Similarly, it doesn't seem like appropriate adjustments were made for square footage in the basement. In our area it is common to have full walkout basements finished to a comparable quality as the above grade portions. In our house it is a full walkout with plenty of windows and will be finished with a large family room/rec room plus another bedroom and 3/4 bathroom. One comparable did not have a finished basement and was 600 square feet smaller in total square footage in the basement, so the value of our home was increased $25,000 relative to that house, that makes sense (though a value of $25,000 on 2,100 square feet of finished basement seems a little low, but at least its something). However, the appraiser did not make adjustments for the basement for any of the other four comps despite what I think are significant differences. In the case of one comp it has over 1,100 less finished square feet and 700 less total square feet, but no adjustment was made. In another case the comp had 800 less finished square feet and 1,700 less total square feet and there is no bedroom in the basement, and again, no adjustment was made.


Finally, the appraiser appears to have made a mistake on age adjustments. Our house and three of the comps are new build, so there are no age adjustments. One of the comps is five years older, so our house was adjusted to be $2,500 LESS valuable due to this age (negative sign), while another was six years older so our house was adjusted to be $3,000 MORE valuable due to this age. Obviously I tend to believe that a new house is more valuable than an older house, so I'm pretty sure the sign is just wrong on the five year old house. It should also be noted that these adjustments are less than 1% of the total price, it seems like a new house should carry more of a premium than that, but I'm less sure on that.


I appreciate any feedback the experts here can provide. I'm working with a mortgage broker who is supposedly following up on my appraisal, but I'm just trying to educate myself as best as I can.

 

[Walter Kirk]

You have a lot of good questions which are difficult to answer without specific knowledge of the market area. It seems obvious that some mistakes are typos which should have been caught and corrected ie the $190,000 pending sale and the adjustments going in the wrong direction.

I suggest that you employ an experienced local appraiser to review this appraisal and explain it to you.

 

[Kim Whiting]

adjusting per sf is a lawsuit waiting to happen.
tell me....when you divide a sale price by the above grade sf to get the price per sf does that take into account granite counter tops, underground sprinkling, a lake view, exceptional landscaping, a pool?
Of course not.
Yet, buyers and their ignorant Realtors use the figure constantly.
Try looking at a cost book for what it costs to build a home per sf.....it aint 90.00-150.00 per sf.

 

[eld2310]

It sounds to me like, at the very least, your appraiser made multiple typing errors resulting in an unreliable report. You should take your concerns to your mortgage company/bank.

I'm surprised that something like this made it through even a cursory quality control process (even if the reviewer isn't an appraiser it's pretty basic to look for consistency in adjustments, and to know that new construction should have a positive adjustment over older homes, not negative). Who is the client on the signature page? I assume it's an appraisal management company, just wondering which one.

 

[stefan olafson]

Low is good when you are purchasing. Having said that it appears there are points in the appraisal that you have a legitimate question about.

I'm not sure on your 1st point, you say it sold for $190k versus $498k, that's enough of a mistake to invalidate the entire appraisal if what you say is true.

Most appraisers wouldn't know what homes sell for per square foot if their lives depended on it. We just don't value on a square footage basis....

Are five smaller bedrooms worth more than four good size bedrooms? What is the typical family size in the area of the US where you are buying? Is there truly a demand anymore for five bedrooms. That may explain the lack of adjustments for bedroom number.

It appears your home has a walkout that is not finished, or was not finished when the appraiser did their inspection. An appraiser typically appraises a property as it is on the date of inspection, if your basement was unfinished then his adjustments may make sense.

Does the market indicate that new homes are 'more valuable' than older ones? Does the new home have all the amenities that a three year old home has, like landscaping etc.

Best of luck, it will work better for you if you visit with the lender and not your mortgage broker. Mortgage brokers tend to p*** off appraisers in general....

 

[Beckles]

I appreciate all of your feedback, I'll comment on what I can, I apologize if some of my answers are too blunt (since honestly some of the comments were blunt I thought) ...

You have a lot of good questions which are difficult to answer without specific knowledge of the market area.

I thought most of my questions were pretty generic, I would expect for example that 1,000 additional square feet of finished area in a walkout basement adds value regardless of market. I certainly understand that appraisers are very careful not to put their professional reputation on the line based on vague internet posts, which is why I tried to be general.

I suggest that you employ an experienced local appraiser to review this appraisal and explain it to you.

This is an interesting comment, here's the thing, I have a bachelors degree in engineering, a masters degree in finance, and another masters degree besides that. If you're saying a reasonably educated person such as myself should not be able to reasonably interpret a Uniform Residential Appraiser Report, then I would say there is something wrong with the Uniform Residential Appraiser Report. That being said, I'm pretty confident I understand what is in the report, which is what I've based my comments on.

adjusting per sf is a lawsuit waiting to happen.
tell me....when you divide a sale price by the above grade sf to get the price per sf does that take into account granite counter tops, underground sprinkling, a lake view, exceptional landscaping, a pool?
Of course not.

I'm interpreting the report I have, and it appears to me that what is done on the sales comparison approach is to choose comparables that in general have similar finishes and amenities. In the case of this appraisal, the appraiser did an okay job of that actually, though I would have preferred to see at least one or two of the comps from the subdivision the home we're buying is in since arguably we are buying in a better subdivision than the comparables (better amenities).

It sounds to me like, at the very least, your appraiser made multiple typing errors resulting in an unreliable report. You should take your concerns to your mortgage company/bank.

I've reaised my concerns with my point of contact, which is my mortgage broker ... still waiting to hear back from them.

I'm surprised that something like this made it through even a cursory quality control process (even if the reviewer isn't an appraiser it's pretty basic to look for consistency in adjustments, and to know that new construction should have a positive adjustment over older homes, not negative). Who is the client on the signature page? I assume it's an appraisal management company, just wondering which one.

The client listed is the mortgage company. Honestly, it appears to me that no quality control was done, because unless the appraiser is trying to expose the buyer and seller for fraud, a $190k comp has no business being in an appraisal for a $430k+ home.

Low is good when you are purchasing.

Not when the purchase price has already been agreed to, I was hoping to show the mortgage company an even better LTV ratio.

I'm not sure on your 1st point, you say it sold for $190k versus $498k, that's enough of a mistake to invalidate the entire appraisal if what you say is true.

Two of the five comps in the sales comparison approach are actively listed properties, not sold properties (they then make a 1% adjustment for list/sale price). The one is currently listed for $498k, but the appraisal says it is currently listed for $190k. There is no reasonable explanation I can think of for this discrepency.

Most appraisers wouldn't know what homes sell for per square foot if their lives depended on it. We just don't value on a square footage basis....

There are five comparables in the appraisal, and each one has a different amount of GLA, so there is an adjustment for each of the five comps based on GLA. If you take the adjustment for each comp in dollars, and divide it by the difference in square footage for each comp, it comes out to exactly $18 for each of the comps, the appraiser used $18 per square foot to calculate that differential.

Are five smaller bedrooms worth more than four good size bedrooms? What is the typical family size in the area of the US where you are buying? Is there truly a demand anymore for five bedrooms. That may explain the lack of adjustments for bedroom number.

And that was one I really wasn't sure about, I can see that being a legitimate approach. Here many times the 'fifth bedroom' is a den with a closet, it is a bedroom in name only.

It appears your home has a walkout that is not finished, or was not finished when the appraiser did their inspection. An appraiser typically appraises a property as it is on the date of inspection, if your basement was unfinished then his adjustments may make sense.

Our purchase price includes money to finish it and the appraisal is supposed to be based on a finished basement, and that is reflected in "Basement & Finished" and "Rooms Below Grade" sections. As I mentioned, the one house that had no finished basement was adjusted to reflect that, but there were no adjustments made for other dramatic differences in finished area on the other comps.

Does the market indicate that new homes are 'more valuable' than older ones?

Regardless if you think a new home is plus or minus an older home, is there any market where a five year old home gets a positive adjustment relative to a new home and a six year old home gets a negative adjustment relative to a new home? It seems obvious to me there is a mistake there, and maybe both should have a positive adjustment, but I'm pretty confident one should not have a positive and one a negative. Now if we were talking a 5 year vs. 106 year old home, that would be a different discussion of course.

Does the new home have all the amenities that a three year old home has, like landscaping etc.

The appraiser did an okay job picking apples to apples on the comps in terms of issues like that.

Best of luck, it will work better for you if you visit with the lender and not your mortgage broker. Mortgage brokers tend to p*** off appraisers in general....

Unfortunately I don't have a direct contact with the lender, I have to work through my broker for now ... I certainly do not like that, but it's the way it is for now.

I'm still waiting to hear back from them what's going on, if the appraiser at least does not fix the one grossly inaccurate comp, then we have a serious problem and I'll have to decide what to do at that point.

 

[Mr Rex]

If there are houses with higher and lower GLA, the $18/sf shouldn't matter. Sounds low from here though, but realistically, with no per/sf GLA adjustment and comps that bracket the GLA, you wind up in the same place value wise, just with a wider range. The $190 sounds like a major typo. The treatment of the basement amenity is the only thing that seems egregious, and that is assuming that a multi degreed civilian can decipher the URAR. FWIW, it was not designed nor intended to be consumer friendly.

 

[Mike Kennedy]

OP,

Questions and Comments:

1. the "$190" comparable had an adjusted value at the bottom of the Grid of _________?

2. if the "$190" comp was used as an "adjusted value" benchmarket i.e. the remaining comparable sale or list prices were adjusted DOWNWARD toward the $190 range - THAT itself would exhibit a MAJOR problem.

Conversely, IF that $190 "comp" was adjusted dramatically upward to bring it up to the range of the other adjusted comparables - that too would exhibit a MAJOR problem.

If the "190" comp's Net Adjusted Sale Value was in close proximity to the range of the other comparable adjusted values - this would indicate a typographical error at the top of the Grid for that Comparable.

IF the "190" comp had NO typo and the adjusted value was significantly or totally absurdly below the other comparables - then clearly it should not have be utilized. The reason for it's inclusion in the SCA must appear in commments under the Grid or on the Comments Addendum. The comments should also stipulate whether it was included pursuant to a demand (assignment condition) by the Lender that the report MUST contain a specified number of additional comparables beyond the "CORE" comparables. Further the report must stipulate which comparables were considered the primary value indicators (after adjustment) and which were supporting comparables.

 

[Mike Kennedy]

Re "the 2100sf Finished Basement":

"In the case of one comp it has over 1,100 less finished square feet and 700 less total square feet, but no adjustment was made. In another case the comp had 800 less finished square feet and 1,700 less total square feet and there is no bedroom in the basement, and again, no adjustment was made."

The market, by lack of any comparables with 2100sf (or more) finished basements may clearly indicate Functional Obsolescence, Superadequacy (Over-improvement) above the largest, similarly finished comparable.

Alternatively, depending on the client required "Turn-around Time" for the assignment, the appraiser may not have done the requisite due diligence in support of an opinion that the subject's basement is atypically large, and atypically finished yielding no additional return on investment in the current market.

Should the required market data research have been done, the search parameters and the results - including addressing the subject's finished basement - should appear in both the Cost Approach and Sales Comparison Approach to Value.

 

[DMZwerg]

they had an active listing as a comparable that is listed at $190k in the appraisal, but is actually listed for $498k (the other four comparables and our house are all $430k and above for comparison). It appears the appraiser completely messed that up.

Per Dodd-Frank you can request that factual errors be corrected.

Given that significant error, I'm really questioning the thoroughness and accuracy of the rest of the appraisal. A couple of other things jump out at me, one is adjustment for GLA differences, they are valuing it at $18 per square foot, so our house is $9,000 more valuable than a comparable with 500 less square feet. Given that the sale price/GLA of the comparables is $106 to $162, that seems low to me.

Per Dodd-Frank you can ask for additional clarification.

I would think a professional appraiser would have to do some serious explaining as to why comparables selling for around $430k and around 3500sf are being adjusted by only $18/sf. I have seen such adjustments (and lower) being valid for poorer urban areas but when talking about $430k properties I would question how many acres the property is on (as in 20ac or 40ac+?) or whether or not it is on the ocean or lake or such. For my markets those three are typically the only way the adjustment would be so low (ave condition in a poor neighborhood, or poor condition but with significant acreage or site features).

Aside from the square footage, and this I'm just not sure about, they did not adjust for different numbers of bedrooms, so my question is whether it's reasonable that a 3500 square foot house with 5 bedrooms has the same value as a similar 3500 square foot house with 4 bedrooms, I always thought bedrooms added value.

Diminished marginal return.
There is generally a huge difference in the functional utility of a 2BR house compared to a 1BR house, a difference between a 3BR and a 2BR, but as BR count rises the question of functional utility can shift to how roomy the various rooms are in comparison to each other (are the bedrooms smaller such that a double-bed is a tight fit? Is the kitchen reduced in size? Does one have a den and the other an extra bedroom?) and at some point having one extra bedroom may add nothing or actually be a slight negative.

Will glance at other points later, but I hope that helped