Was the appraisal wrong?

[Dee Dee]

Terry,
Most of the questions that you are asking will be answered when you begin taking appraisal classes.
The process of coming up with an estimated value is more complicated than what most people understand. Certain criteria needs to be met in order for the appraisal to be presentable to the lender/client. If the value is 'propped up', there must be data to justify doing so. If their is no supporting data, then chances are the appraisal will be scrutinized by the reviewers. The reviewers are the ones who, in the end, determine wether or not to loan the money for the property being appraised. They are the ones taking the risk if the property is overvalued, moreso than the borrower who could default and leave the lender holding the messy bag.

Here's an example of a typical appraisers day. Last evening I recieved an appraisal order from a lender to appraise what she described as an approximately 4,000 SF log home on 40 acres. The information was based on the homeowners description, and apparently the homeowner felt the property was worth about $550,000. I pulled the county records and the home is described as a 2,100 SF log ranch with a 1750 SF basement, on a little under 3 acres. Apparently the homeowner owns a large parcel of land (37 acres) that is not a part of the property that the home sits on. Guess what? I've never seen a lender willing to combine vacant lots along with what the title commitment shows the home is on and refinance on the combined value. Reason? Because hypothetically, if the combined value was $550,000 and the lender refinanced based on that amount, then the homeowner sold off the vacant parcel, the existing home and 3 acres would be mortgaged well in excess of the value that it is worth. The assessor's office has a value of $260,000 on the house and 3 acres. Although it is a vague number to use as a guideline, you can easily see where there would be a huge discrepency. In addition, the basement level is not worth anywhere near as much as above ground square footage. I will be breaking this wonderful news to the lender, who in turn will have to give the homeowner a reality check, which is rarely well recieved. I have little doubt that this homeowner was already rubbing his hands together and planning on how he would spend all of his newfound wealth. Sorry Mr.Homeowner...the system doesn't work that way, even if you think it's unfair.

 

[Austin]

Let me give one other little tidbit of information referenced above. In the MLS book, 75% of local Realtors will count finished basement in the GLA. If you make that mistake and then use this sale as a comparable based on that GLA report, in a 1,000 sf house with a full finished basement you could make a $30,000 adjustment error. In a cape COD or split foyer with the lower level finished, the Realtors will come up with a wide variety of GLA numbers. Probably the worst case I run into of over sold properties is a basic fair quality dwelling that is super adequate. For example, I pull up in the drive way and the dwelling is a fair quality rancher with 1,000 sf of GLA. It has a front porch, carport, fireplace, large deck, finished basement rooms, fenced back yard, large detached storage building, and some times a detached garage. Owner is usually a handy man and none of this information is on the tax records. A Realtor in doing their competitive market analysis will find three similar homes with none of the above and make adjustments of $3,000 for the front porch, $3,000 for the carport, $2,000 for a deck, $10,000 for finished basement, $2,000 for the fencing, $2,500 for the detached storage building, and $10,000 for the detached garage. That is $32,500 in extras on a $70,000 property class house that the comparable sales don’t have. It is equivalent to saying cost equals price. In practice, when you get over 15% above the average price for that class of property, you are in no-man’s-land. If you can't bracket it, you can't measure it.

 

[Caterina Platt]

Dear ATC,

How unusual was this home in your marketplace? Your post with the 1.5 and 1.0 leads me to assume million? In my market, those are fairly few and far between which throws in all sorts of complications to the valuation process.

Was this dwellng somewhat typical? Are we talking about a large, specialized, 'trophy' home? If so, the level of accuracy in valuing these can be hard to rely upon due to the lack of data of similar homes.

Just curious.

 

[Terry Russell]

Hey,
Thanks for all the great input. And Dee Dee your right I will learn more about this down the line, but I was given some great lessons today. Thanks for taking the time to reply, all of you.

I have several volumes of questions, but I do not want to take advantage of your time.

Caterina, the property sale was just a hypothetical situation. The property was common to others in the area in which it was located.

But, I thought someone would ask if there were any similar properties on the market at the same time of this transaction.

There wasn't.

Terry

 

[Dee Dee]

Terry,
Don't worry about taking up our time...we just love talking (typing?) about it when we think we know more than someone else. :lol:
Jump in whenever you want.

Dee Dee

 

[Tom Hildebrandt]

The first step in the appraisal process is correctly identifying the appraisal problem, I thinkmany in this this thread missed the real essence of the fundemental question.

If the question asked by the property owner is what is the most probable price, ie, market value as defined in the glossary of USPAP and in most lending work, then, in my opinion, most of Austins comments are correct.

However, the real question being asked by a seller, is what is the maximum possible price at which I might sell my house. The definition of value has changed and the answer can, and should be at or near the upper range of property sales.

How you define the specific problem in this particular assignment shows the real difference between CMA's developed by brokers to get listing and appraisals done by appraisers for lending purposes.

Regards

Tom Hildebrandt GAA

 

[Anonymous]

Several years ago my uncle wanted to sell his house. I checked sales on his block, all the same style, condition and age and found that none had sold for over $75,000 (this was a few years ago. My uncle wanted $90,000 for his house and placed an ad in the newspaper. Three weeks later he sold it for $88,000. The buyer paid cash, no mortgage or appraisal involved. The buyer was quite happy with the house since it was next to his sister's house. Of course appraisers know that the buyer was not typically motivated but my uncle thinks that I'm a bad appraiser!

 

[Bemis Pownall]

did a review couple months ago
under contract $550 or what ever
comps are miles away appraiser puts 6 blocks
ignores sales on same street with same view, same builder, age, condition etc.
report was in total violation of USPAP and very misleading
I cut report by $150k+/-

deal closed $550K

Was I wrong for demanding appraiser follow guidelines?
The report is so misleading the Real Estate Appraisal Board would have a good read..
I just gotta say "whatever....."