A Potential Concern with Appraisals
If only one property is used for comparison, such as a short sale, then the comparable price would tend to be lower.
If only one property is used for comparison, such as a standard sale where the price was raised for closing help or where the buyers just had to have the house because it was next door to mom, then the comparable price would tend to be higher.
Obviously, the above two statements show the need to compare to more than one house.
A question arises as to how many houses should be used for comparison.
An appraiser typically uses 3 to 5 properties for comparison.
However, if more properties are used for comparison, then it is more likely to take out any statistical anomalies.
For a given property there may be 18 reasonably comparable properties where the average of all of them is $300,000 after adjustments to the subject property, but where the lower half averages $285,000 and the upper half averages $315,000.
Given the smaller sample size of an appraiser, it is easy for the appraiser to pick the houses which meet the higher price such as the $315,000, or for the appraiser to pick the houses which meet the lower price such as the $285,000.
This may explain why an appraised value is so often very close to the contract price.
If an offer is accepted on a property at the higher value, and the appraiser uses the comparable properties with the higher sold prices, such that it appraises, but then the contract falls through, the seller is left with the impression that the property is worth that amount.
However, if another buyer comes along, they have the data which suggests that it is really worth the lower amount, in spite of the appraisal, even though they understand how the higher appraised value was obtained.
It leaves the buyer with a difficult decision.
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