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Appraisals vs. Market Value

Yep. I'm gonna stir the pot and hope that everyone gets to fire a shot into the bowl.

I recently took over 2 new files containing over 35 properties. All are rentals.

The lenders had all of the properties appraised recently. Let's call it within the last 60 days. Yes. That's 2 months ago.

These properties are located in 3 different counties and 5 different towns. There were a total of 6 different appraisers.

Just to double check the values from the appraisers I don't know, I engaged some folks I do know to provide BPO's on the same assets. Since I have read the appraisals, I did not conduct any of the BPO's myself.

So far, the BPO Values are coming in between 39% and 73% of the appraised value.

Why is this? What is it about appraisal standards that continuously value property higher than it can ever be sold for? Is that the problem or is it that the agents and brokers doing the BPO's are wrong? Are they always too low and are the appraisers always right?

Hmmm....

This whole thing just kills me. 39%? That's 61% difference of opinion between 2 professionals.

Honestly, I don't believe appraisals anymore. I don't believe the ones in these files, don't believe the one on my office space and don't believe the one done on my home. I can't sell my house for the appraised value or anywhere near it. Same thing at the office.

Good for me that the bank still believes in appraisals !! Gotta love that home equity line of credit !!!!!

Hopefully one of these days there will be a better way. Maybe someone will change the appraisal standards and "highest and best" will become "most likely".

Richard F. Kruse is the President of Columbus, Ohio based Gryphon USA, Ltd. (www.gryphonusa.com). The Gryphon Organization includes Gryphon Asset Management providing receivership and consulting services in the distressed marketplace, United Country Ohio Realty & Auction Group (www.ucohiorealty.com & www.ucohioauctions.com) providing real estate brokerage and auction services throughout Ohio and OnlineAuctionUSA.com (www.onlineauctionusa.com) providing commercial asset liquidations from the Midwest to East Coast.

United Country Ohio Realty & Auction Career Opportunities Available. Call 614-885-0020 x 17

Posted by Rich Kruse on 11/23/2007 01:55 PM

Comments (19)

appraisals, bpo, lender, equity

Originally posted at: Asset Management & Recovery: Appraisals vs. Market Value

Post is included in group: REO REALTORS

19 Comments on Appraisals vs. Market Value

NOV

2007

I think that appraisers do this so that you like them. I think they give you a higher price so that you will use them over and over again. I think that is going to come around and bite them sonner than later.

Darn Rich they aren't even close!! First off appraisals are based on historical data i.e sold properties. BPOs are based on historical and current i.e active and pendings. In my market where the last sale could be 60 to 90 old, appraisals can be way off. Values are declining rapidly and a 90 day old closing has nothing to do with the value today, or better yet, the value 30 to 60 days from now which is where I need to price the property to get it sold.

Good points. I never really thought about just not putting any credit in appraisals anymore. That's pretty scary if we can't trust the one part of the industry that's supposed to give a true determination of the values.

that has ben the case for years

In addition to what BB has said, doesn't MAI still stand for made as instructed?

yes I agree. you have good points here. Thanks

It sounds like until these properties sell, we won't have a clear picture on what's going on. There are a couple of factors that I'd love to know...

Were all the appraisal reports ordered by the person?
Were the reports ordered for lending/refinance purpose?
What was the difference in comparable sales used to determine final value?

Appraisers do work with historic sales data and usually that is the preliminary gauge of a final reconcilation of value. As anyone can put a 'for sale' sign up in their yard and ask for $1,000,000 for their shack, we cannot justify using active sales (pending... sometimes, yes).

Sadly, the standard appraisal request form actually has a field where a Loan Officer puts the 'estimated value' (or sales price depending on the transaction type). Although it is innocently noted as an estimated value, Appraisers know this means 'I need this value' (sometimes Loan Officers will actually type that in the comment section). We also know that if we don't either a) hint to the Loan Officer that this value may be unobtainable or b) hit that value +, we have likely lost a client or have to fight for the appraisal fee (if invoiced).

Wouldn't it be grand to start an 'internship' program where we could switch off doing ride-alongs and job swaps with other people in the industry to truly understand each other?

NOV

2007

Vincent - As Sarah points out, it is so you will hire them again.

BB - You make my point for me. There is a huge difference between what we can get it to appraise for and what we can really sell it for.

Lisa - I think about it all the time. I am asked "how close to appraised value can you sell my property?". I'm not arrogant enough to reply "nowhere" as I have not seen the report, but it would usually be a safe comment to make.

Jeff - That doesn't make it right.

Jim - What, MAI doesn't mean All Knowing?

Donald - I wish I didn't.

Sara - The orders were placed by different people and were for the purposes of determaning an AS IS FMV for foreclosure purposes. I am still going through the differences in comps, however there are already insances of going 5 miles to find an ideal comp sale. This is residential inner city stuff.

I actually love the ride-along idea. Could we start with me? I'd love to show one of these guys a crackhouse that has an 80% probablility of being stripped and ask them why the comps are all being lived in with wonderful pride of ownership ??? This isn't hard stuff.

the biggest issue is that is upward or downward moving markets you can fool yourself with 6 month old comps

the last 60 days in these types of tranactions should be all you are lokking at

plus it depends how lazy the appraiser is

As an appraiser, I am the first to admit there is a serious problem with the appraisal profession. It begins with lenders telling appraisers that if you don't hit a certain number, then they will order the appraisal from someone who will. It is aggravated by having a licensing system that allows someone to learn how to fill out a form with boilerplate and call themselves an appraiser. This is a serious issue that state boards and the ASC is beginning to address. Educational and experience requirements are becoming far more stringent as of 1/1/08.

If you find appraisals overstating the value by 30% then that appraisal should be reported to the Real Estate Board and sanctions should be levied against the appraiser. A minimum of reeducation and preferably revocation of the license is in order. If you look at the lender, you will find, more than likely, a storefront mortgage broker whose only concern was getting the value up to where they can get their deal done, preferably with a nice YSP. All too often these brokers/loan officers would insist on hitting their value, holding anticipated future work as an incentive to fudge the numbers or the square footage. If that is the kind of appraisal you are holding, it is not worth the paper it is written on, as Merrill Lynch, Countrywide, and WAMU is discovering.

If you want an honest, bankable, IRS acceptable estimate of value, hire your own appraiser. If you have good access to MLS and/or a compliant broker, then to just learn what the range of value is, get a BPO/CMA.

Rich -

With the information provided, I have to agree with Goodpasture. It's just shocking that you have six appraisers that are all in need of a good wrist slapping.

I suppose you're going to have to take your largest vehicle out on this ride-along :-)

NOV

2007

Just another can of worms waiting to be opened and spilled everywhere.

Goodpasture - I usually only hire agents for the BPO's. This is where I am finding the issues.

Sara - I don't know what is going on, but I will need to rent a bus if we go that route.

Fran - Big can.

NOV

2007

Rich,

As an appraiser, a myriad of questions come to mind. A large portion of our business is review appraisals and I am often dismayed at the lack of quality on the ones that I review. These are typically reports that flew up flags in the lender QC departments. Although I rarely get to see the good reports, I know they are out there. I am curious if the six appraisers were actually designated (MAI, SRA, RAA, etc) and if you can tell if these appraisers were trainees, newly certified, or veteran appraisers? Is this the first time you have noticed a huge % difference with appraisals vs BPO's or has this only become prevalent in recent times?

Robert - I don't know their qualifiactions as I didn't hire them. It is common practice to have apprentices here do the work and have it "reviewed" by a licensee and then submitted under their license.

I stopped paying attention to appraisals a long time ago. It wasn't worth the brain time. Drive by only, no interior inspection as to condition, assuming the "best" case scenario. In my world the property is usually messed up and there is no "best case". It is just this recent set of files had the appraisals done such a short time ago, I thought I would compare them. The bank had the properties appraised by the workout department or the "bad loan department". The appraisers needed to take into consideration a lot of factors and norms. From what I can tell, they didn't. The comps are not distressed assets, but the subject is. Big difference in value.

The bank has a valuation that says X and I come in and say Y. Holy COW !!! I took the broken windows, 10 dogs on the porch and stoned tenant as an indication of condition then saw 15 sales between $35-42k in the neighborhood.

Appraiser says 1480 SF, check. Within .5 miles, check. Yard is 35 x 125, check. Ooooh. There are 3 recorded sales in the last 6 months between $65 and 72k. Value is $69,500, check.

Uh, ok? What about the lower sales there, Rock Star?

Sorry Robert. It's not you. I just fight this fight every day. There is a spot on my wall that says "bang here".

JAN

2008

Some appraisers stay in business by meeting the production demands of lenders (and agents).

Other appraisers stay in business by understanding cold hard data.

Data does some unpleasant things to deals. Data slows things down and demands more questions and answers. Data like statistically significant samplings vs 3 comps. Data like trending as noted by absorption rates and months of listing inventory. Data like the motivations and concessions of sellers. Data like what is actually happening on the subject's block of homes. Data like marketing and exposure time. Data like regression analysis charts that show the direction the market is taking within the plat. Data like knowing the appeal of one style over another, the appeal of one block over the next block, the appeal of one season over another. Data like the life expectancy of one builder/quality product over another.

Data does not always say what you want it to say; neither does a good appraiser.

JAN

2008

UMMM- HAS ANYONE SEEN THE POST ABOUT THE MORTGAGE LENDER GETTING AXED? No, really- the pissed off borrower actually WENT AFTER the mortgage broker w/ intent to kill.....check it out on ml-implosion.com

I had to print it out and tape it to my lenders' door!

JAN

2008

Rich,

There are good and bad real estate people in this business. I did not review those appraisals or BPO'S in question, but it is not fair to say that all appraisers are incompetent and that you would not trust them. If those appraisers in question inflated values or made a misleading report, I would question them to how they came up with that value.

As gooodpasture said, we do need changes in the appraisal profession. I also believe that loan officers should be licensed and held accountable for their actions. In addition, realtors who take on BPO work should not take orders from banks if they aren't knowledgeable on market trends and what a true comparable is.

Education and proper licensing is key. Discipline should be enforced if rules are broken or fraud is committed.

Look forward to servicing your appraisal needs,

Philip Maltaghati

New York State Certified Residential Appraiser

FEB

2008

As a licensed appraiser I know there are plenty of shady appraisals being done. Just like there are plenty of shady realtors, car salesmen, plumbers, electricians, politicians, home builders, lenders, ,,,,, and so on and so on.

No matter what you need, get a good reccommendation. Don't slam all because of one.

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