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All Appraisals Are NOT Created Equal

Once again I find myself prepared for a listing appointment wherein the seller will have to bring a lot of $$$ to the closing table in order to sell the house.

This happens more than you might think...say you buy a house for $145m. Then decide to do some upgrades, so you want a home equity line for $20m. Your bank calls out an appraiser who says it's worth $172m. Hooray, you think, I got a great deal on my house!

So then you decide to sell a year later. You still owe $165m on the house (you spent the whole $20m on upgrades and paying off credit cards and such). But hey-that appraisal from last year was for $172m, so SURELY the house is worth even more today!

But when I run numbers on your house, the absolute max end of the price range for your floorplan, even all decked out in its upgraded glory, is $168m. And that's going to be a stretch.

You thought it would surely be in the $180s...but it's not. Nothing in your neighborhood has EVER cracked that $170m barrier-and it's not going to be your house, either, at this current point in the market.

I share this story to remind you that if you were to call three appraisers out to your home, they would find three different numbers. This is not a slam on the appraisal industry, it's a truth. Each appraiser has their own methodology for arriving at a number. And more importantly-each appraisal is ordered for a different reason. A purchase appraisal will be different than a refi appraisal will be different than a home equity appraisal. Why? Because the banks have different amounts of risk in each of the three reasons. And especially with home equity, they're looking forward to making money on your interest payments.

Please talk to your local real estate professional about current market conditions before you make any decisions regarding that NEXT house-and let us share our knowledge with you. That appraisal in your hand may not be worth anything in today's purchaser market.

Posted by Leigh Brown Charlotte NC Broker/Owner on 12/29/2006 03:10 PM

Comments (9)

appraisals, listing agent, sell my home, charlotte nc real estate, concord nc real estate, north carolina

9 Comments on All Appraisals Are NOT Created Equal

DEC

2006

I make a point of telling people that there is more than one value for their home. There is the price the seller puts on it. There is the price a buyer is willing to pay and then the price the bank is willing to loan on. Many times those three numbers are not the same.

Hi Leigh.. there are a couple things I am thinking as I read your post. They are not directed AT you for a response,. (although I would welcome one, of course). just thoughts entering my head as I read.

First, I'm assumming you are talking in the Millions range with the M.
(just wanted to say that because of what I will say next).

For Jumbo loans, the bank needs more than 1 appraisal.. IF we are talking millions, I (personally) would want a second opinion as well.. (not just because the bank wants it). Especially if I'm going to dump 20M into a house. I would want 2 appraisals AS-IS and one AS-IF the upgrades were done.
For a homeowner with that kind of money.. how can they honestly think its worth $172 Mil if nothing has "EVER cracked that $170m barrier"? I dont have millions and I could figure that one out!
How did the appraiser conclude at $172M when nothing has sold over $170M??
Why would an owner of a home of such an enormous amount of value want to spend 20Mil on upgrades if they will be selling in a year?? (I can only assume that someting happened in their life to make them want to sell after they did the upgrades). 1 dollar invested in upgrades does not = 1 dollar of value. If they wanted to do the upgrades to get more dough on the sale, I say "wrong answer".
when were are talking upgrades (not renovation or repair) the main purpose of the upgrade should be understood that it is for the owners pleasure and enjoyment, not to obtain more value. (see last line in #4). my most used line (never said directly to a homeowner is) "I hope you enjoyed it", because it isn't adding to value $1 per $1. i.e.**you drop 40K into a pool to enjoy the pool, not to capture and extra 10-15K at resale**

I will agree that 3 different appraisers may arrive at 3 different values. After all, its an opinion of value based on facts. opinion being a key word. Appraising is not an exact science. the range should be however within a 10%-15% margin of difference between different apprasiers, IMHO.

I may be reading into this differently than you are expressing it.. "A purchase appraisal will be different than a refi appraisal will be different than a home equity appraisal. "
I could be wrong, but to me an appraisal is an appraisal. period. Whether your refi-ing, buying or just want to know, the opinion of value is the same. What I think you are saying (now that I re-read it) is that from the banks point of view there are different underwriting guidelines that they require for different types of loans. yes? no? ok, ok i get it..its just that the title to the post threw me off. I think appraisal are created equal.

I do appreciate your statement that you are not slamming appraisers.. thanks. I didn't feel slammed. :))
I hope that you dont feel attacked, because I'm just voicing thoughts, not going against what your saying. you know it all love over here.. :))

I also like Randy's comments. well said. its all about perspective.

PS.. can you tell I have an opinion when it comes to appraisals? :)) I hope it didn't come off too jerky. :^o

Actually, Nick, my old stockbroker habits die hard! m=thousands and mm=millions. =) i just have trouble with the whole K thing.

I don't feel attacked, ya know. It's just that not all appraisers have the same high standards of most of you guys here on AR. I think the point of value should be the same no matter the purpose of the appraisal, but in my experience they're all over the place. Probably part of the problem stems from that 125% of value home equity business...but we won't go there.

Randy-that's a good dialogue-

hhmmm.. then forget i said anything. :)) , except for the part that there is nothing but love over here and Randy's good comment. oh yeah, and the comment about $1 in doesn't = $1 out.

BTW, I was wondering where in NC where there 170 Million dollar homes, and that you were some kind of Super Agent...

well.. you still are a Super Agent! :))

Never fear-the love flows both ways. =) I wish there were a good way to get it through folks' heads that $1 does not equal $1 out...but no matter how many statistics and studies appear, they just don't always get it.

and the day I sell a $170MM house is the day I retire. =) as long as I get full sticker on my commission...heaven knows that size transaction would be one that would make me earn it for sure!

let me know if you need a hand with that deal.. or whatever else.. :))))

Leigh,

Yes, all appraisals unfortunately are not created equally. I am a State of California Certified General Real Estate Appraiser, and I am a professional. What you ran into with the appraisal for the prior sale sounds more like fraud, not mistakes by the previous appraiser. What Real Estate Agents do not seen to grasp is that the appraiser is not the perpetrator of the mortgage fraud, they do not begin the fraud process. However appraisers are enablers by inflating values for the fraud meisters who did begin the fradulant transaction.

When they need a "high" value for a sale or a refi, Loan Agents conduct a telephone process called a "Comp Check". There should be a good business reason for trying to determine whether the value or sales price of a property is high enough to where it makes sense to make a loan. If the value is not there, why spend everyones time and money pursuing a transaction that doesn't make sense? However, the fraudmeister Loan Agent and the fraudmeister Listing Agent who sold the property are ONLY looking for the appraiser who will agree to bring in the value, no matter how "off-the-mark" it is.

In all of our appraisals, we appraisers are required to certify compliance with the Uniform Standards of Professional Appraisal Practice (USPAP). We are required to be aware of and employ proper appraisal procedures, including verification of market data, AND using COMPARABLE market data. We are also required to use due dilligence and verify market conditions, and market trends as well as concessions, freebies, "sweeteners", cash-backs, etc. This is the time consuming element in the appraisal process.

We as appraisers are under intense pressure for SPEED and are constantly told to "GET THAT APPRAISAL BACK QUICKLY". This makes the appraiser who is willing to "look-the-other-way" anchor on sales price only, go fast & not properly analyze the market. This type of appraiser will always appraise a property for $200,000 when 7 Expired, Cancelled, and Withdrawn Listings are in the local MLS Board at list prices that NEVER exceeded $165,000. I'm taking a wild guess that this happened in the case of the prior appraisal for your seller.

Question: Did you look at the prior appraisal to determine what COMPs the prior appraiser used. You sound like a professional agent familiar with the neighborhood in which this property is located. Therefore, you should be able to quickly spot whether the appraiser used reasonable COMPs and properly analyzed them. If they didn't and you think the appraiser committed fraud, TURN THE APPRAISER IN & GET THEM OUT OF MY PROFESSION!!

Let me ask you another question: Was one of your fellow Real Estate Agents involved in that prior sale? If they were, and I'm guessing there was an Real Estate Agent involved in that prior sale, do you really think that Listing Agent was unaware that "nothing in that neighborhood had EVER cracked that $170k barrier" as you stated in your article. And, do you really think this Listing Agent was concerned about this? Do you really think the Loan Agent who handled that loan for your seller was concerned that the house was overvalued? Well let me tell you something: the only thing either the Listing Agent or the Loan Agent was concerned with was getting an appraiser to appraise the sales price so they both could collect their phoney-baloney commissions!!

I disagree with the phrase: "appraising is not an exact science", mostly with the term "exact". Three appraisers, employing proper appraisal procedures, analyzing comparable properties in a subject neighborhood and analyzing the market and market trends in that market, should be able to abstract reasonably similar adjustments from the market data to be able to reconcile values within a range of plus or minus 5% of the sales price. This assumes that knowledgeable and ethical appraisers properly apply all of the appraisal procedures

I am assuming that your market is either in or entering into the most current downcycle. I am going into my 29th year as a professional appraiser, so this is my third downcycle since 1978. (this is specific to the Southern California market.) All real estate markets are going to be massively affected by the appraisal and loan fraud that has taken place over the last 5+ years especially in So. CA. In our market, loan fraud is only one of the elements that will calus problems, the other is the proliferation of risky, 100% loans at teaser rates that have been made by banks & mortgage companies

Another appraiser friend of mine & I have been stating that values have been trending down for over a year. Until the end of last summer, we were like "chicken little", no one wanted to believe that value declines were happening. Now, because declining prices have been documented & the press is full of articles that state that values are declining, there are even more fraud schemes to prop up prices. I know of a fraud where a buyer "packed" a $100,000 rebate, "under-the-table" back to the buyer & the property is selling at $120,000+ higher than the October Expired Listing.

Finally, I make the forecast that there is going to be a "blood bath" in most, if not all of the country when all of the sins of my appraiser peers, the sins of the Real Estate Agents, Loan Agents and all of the risky loans that have been made over the last 5-years, all "hit-the-fan" over the next 3 to 4 years.

As a case-in-point, because of huge inventories, and lack of sales, new home tracts in my market area are packing in $100,000+ in boats, cars, motor homes, & direct cash back to buyers, that are not being reflected in most valuations. The CA Association of Realtors, NAR and Data Quick are not factoring in these schemes. If the were, the decline in values in my area would be much more significant.

That coupled with the reported $1 trillion in loans that are going to be "re-indexed" over the next 18 months will mean many borrowers will have to deal with loan payments that will double or triple. What do you think will happen when even a small percentage of these people try to sell their homes, which have already declined in value from when they bought their homes with 100% financing?? The outlook is not good!

We'll see if my forcast is on-the-money or not. I am hopeful that I'm overstating things, but I don't think so.

Sincerely,

John C. Carlson Certified General Real Estate Appraiser, Diamond Bar, CA

DEC

2006

Wow-John-that was a very well-presented and thought out response! Thank you!

Just to clear up a little-there was no agent involved in the $172m price-that was what the bank's called appraiser arrived at when the homeowners were obtaining the home equity line.

Also, our market is trending up, Charlotte NC is a contrary market and we've been flat for the past 5 years while the 'bubble' has been growing.

Hi Mr Carlson.. My hat goes off to you for a couple reasons. your comment is very well stated and makes great points which I agree with, except for the comment on 'exact'. You have been in this business much longer than myself so I will be treading lightly with this comment for a lot of respect is due to you, sir.
I thank you for your comment and highlighting what its like from an appraiser's perspective. very well said. I wish I could articulate it that well.

The reason I stated its not exact, is becuase as we both said the reconciliaton should be within a similar range. ->(as per your words) "within a range of plus or minus 5% of the sales price"
-> (as per my words), "within a 10%-15% margin of difference between different apprasiers"

so we are both saying 10% range or "plus or minus 5%", which is the same thing.

But you stated: I disagree with the phrase: "appraising is not an exact science", mostly with the term "exact".
My humble response is that if it was exact, we would be reconciling at the exact same number. That is why I state it's not exact, but I sdo agree with everything you said. With the same market data we should be abstracting similar adjustments and values.

So as I see it, we agree on the same idea, but for some reason have different viewpoint on the wording.

John, if I may call you John, I hope that you will join Active Rain and contribute from an appraiser's point of view. Your experience and viewpoint are priceless. To both the public, Realtors and appraisers. I hope to see you here and would like to welcome you to join.

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