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A Potential Concern with Appraisals

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Real Estate Agent with 410-935-5844 Office 634480

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.

 

Comments (8)

Eric Bouler
Gardner Realtors, Licensed in La. - New Orleans, LA
Listening to your Needs

Never seen an appraisal with less than 3 comparables.

Dec 18, 2016 02:44 PM
MichelleCherie Carr Crowe .Just Call. 408-252-8900
Get Results Team...Just Call (408) 252-8900! . DRE #00901962 . Licensed to Sell since 1985 . Altas Realty - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years

Fair market value remains what a property is worth to a willing and able buyer and seller.

Dec 18, 2016 04:47 PM
William Feela
WHISPERING PINES REALTY - North Branch, MN
Realtor, Whispering Pines Realty 651-674-5999 No.

I have found that if an appraisal is off by a lot it seems that short cuts were taken.

Dec 18, 2016 05:37 PM
Ed Silva, 203-206-0754
Mapleridge Realty, CT 203-206-0754 - Waterbury, CT
Central CT Real Estate Broker Serving all equally

In our state the standard is to not used any type of distressed comparable for a sales analysis as they will skew the values.   At least 3 and never more than 5

Dec 18, 2016 07:29 PM
Ron Trzcinski, 410-935-5844
410-935-5844 Office - Cockeysville, MD

Eric,

I have never seen one with less than 3 either.  It really would be questionable with so few.

Dec 19, 2016 08:54 AM
Ron Trzcinski, 410-935-5844
410-935-5844 Office - Cockeysville, MD

Michelle,

That is true, at least, until the bank gets involved.

Dec 19, 2016 08:55 AM
Ron Trzcinski, 410-935-5844
410-935-5844 Office - Cockeysville, MD

William,

Not very often, but I have seen where they have been too far off.  In one case, the appraiser used a property which had not yet sold.  Was it a short cut or just not paying attention?

Dec 19, 2016 08:58 AM
Ron Trzcinski, 410-935-5844
410-935-5844 Office - Cockeysville, MD

Ed,

That makes sense, although not too many years ago, some parts of my market were seeing 50% of the sales distressed.  It was hard to ignore.

Dec 19, 2016 09:01 AM