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Your Appraisal Is Wrong

Appraisals are typically regarded as the most accurate measure of a home's value, and for good reason. Licensed to perform one task and one task only, appraisers see and evaluate property all day, every day. While some of us more egocentric Realtors feel that we put more time and effort into our own opinions of value, considering we will ultimately bear the responsibility of bringing the home to market and selling it, that bit of vanity is neither here nor there. Appraisers, though many underwriters these days are loathe to admit it, are still considered the ultimate authority on worth outside of a willing buyer and seller.

Appraisers, however, are often hamstrung by their own guidelines in keeping pace with the current market. This can be beneficial, such as when prices were artificially exploding between 2005-2006. We agents lamented the stodgy appraisers who were too rooted in the past (closed sales) to acknowledge the present (upward trending prices) while values were exploding. You couldn't attend an office meeting without a colleague or six bemoaning the bozo appraiser who didn't grasp the current market. If only our industry at large had been so conservative.

Normally the protective ally of the bank and the buyer, I have noticed an interesting shift as of late, however. Appraisers have become a seller's best friend. Before you toss me out on my heretical ear, hear me out.

Appraisers have begun to view the market in two distinct categories. There is the general non-distressed resale home market, and then there is the foreclosure market. When evaluating a property, most seem to have taken to lumping properties into one grouping or the other. Their subsequent findings are based upon the homogeneous pairings: bank-owned properties are comped against other bank-owned properties and standard resale homes are comped against other standard resale homes.

It sounds great in theory, but the problem with this new pattern is two-fold. First, there is the matter of pure sales volume. The action in our current market is more heavily dominated by foreclosure properties than any point in memory. It's undeniable. The mini sales boom that has seen a steady increase in total closed and pending sales in each of the last several months here in the greater Phoenix area is due in large part to the allure of these lower priced options. As such, it is just not feasible to ignore this growing segment of the market when trying to determine the value of a home. The data is often quite scarce when trawling for non-distressed sales upon which to base an evaluation. By and large, the higher priced resale homes just aren't selling with a great enough frequency to provide adequate comparison data.

The other issue is the problematic assumption that a buyer cares. If the home next to your own has been foreclosed upon and is listed at $200,000 less, do you honestly think the buyer will buy yours if all other things are equal? Is a buyer really expected to see anything beyond the price and the condition? The label of "bank-owned" versus "resale" is wholly irrelevant to what a buyer is willing to pay. Shoot, I have seen quite a few remodeled bank-owned or short sale properties that put many dog-eared resale listings to shame. And yet, they are somehow devalued or eliminated from the consideration of value for other homes in the neighborhood simply because of the conjured stigma. Buyers may start their search with one particular market segment in mind (distressed property shoppers looking for a deal, resale shoppers looking for a well maintained home), but they will ultimately look at everything that fits their price and need requirements. Labels be damned.

I sure like it when my appraisal tells me my home is worth more by ignoring completely the last four neighborhood comps, but I know the real score. No buyer will pay me what my current appraisal tells me it's worth. No way. I know better than to be the ostrich who thinks that the homes that are actually selling right now have no impact on my property value because they are "distressed." Guess what, buckaroo, those sales are distressing the entire market. There may be microcosms within the market at large, but they are amoebic. The uneven boundaries protruding against each other as they occupy overlapping space.

So while there is still plenty of benefit in having your home evaluated by a neutral authority, just remember not to spend all of that anticipated equity before your buyer signs on the dotted line. You just might be unpleasantly surprised when he doesn't downgrade the competition or recent sales comps like your appraiser did.

Posted by Paul Slaybaugh, Scottsdale AZ Real Estate on 03/14/2009 05:44 PM

Comments (56)

Home Values in the Home Selling Channel

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Originally posted at: The Scottsdale Real Estate Files: Your Appraisal Is Wrong

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56 Comments on Your Appraisal Is Wrong

MAR

I have really not experienced an appraiser comparing an non foreclsoure transaction to something that has been foreclosed and significantly down grading the value. Foreclosures certainly do change values though. I have been fortunate that in my area a foreclosure may in some small way effect value but there are not enough of them to really drag the values down overall.

Hi Paul, Thispost is remarably wonderful in scope and your examples of what is really happening in the market place is right on. I was actually going to write about this very subject today but I doubt it would have ever read as good as this one. I think this is a feature just waiting for the gold star. You have become quite the writer Paul and I love your wonderful choice of words that brings the subject home and makes it so personal. You might have really missed your calling as one of todays better journalists. Well done indeed.

Bill, as you can imagine, we are essentially Ground Zero 1-A if not Ground Zero itself for foreclosures. Along with Vegas, Florida and California, our market supernova'd with speculation, and here we are. As such, appraisers are often treating resale homes with kid gloves in my recent experience. I fear that this may artificially inflate not only expectations, but fuel more borrowing against an asset that has depreciated more than both the bank and the homeowner believe. It is real in our market. Last three appraisals I have been present for, the appraiser made mention of not looking at particular sales that were foreclosures. Interesting twist to say the least.

William, I think this is a growing trend that has not been adequately discussed in the markets most heavily buried by foreclosure properties. You would do well to write about it for your audience, too. Much to the chagrin of many, there are not two coexisting markets. There is only one. I think appraising value differently will only serve to increase the artificial gulf between bank and resale properties. Much as we hate to admit it, our homes are not placed upon pedestals just because we pay our mortgages on time. A house is a house. The second wave of the foreclosure crisis is going to hit when the folks who think their values are above the fray eventually have to sell. Many of those not in immediate financial crisis are not placing their homes on the market, and for good reason, but life circumstances will eventually force some off the sidelines, and they will be in for a rude awakening. The gap between the assumed value of the resale market and the foreclosure market will have to be further reconciled before this whole mess reaches the baseline. I think we've essentially found bottom with the bank properties, but the rest of the market still needs to trend further down before buyers will transition back to traditional mom and pop resale homes.

And thank you again for being such a vocal supporter of mine, William. I mean it. Thank you.

Ugh. I'm dealing with one such case right now. The appraiser is holding up the entire deal by looking at asking for the wrong criteria in my (and the other parties to this transactions) eyes. Of course it doesnt help that they sent an appraiser from 2 counties away who has no knowledge of the local market ... Jack Bauer would have appraised it right ... and would have done it in 24 hours

Cheers Paul !

Sheldon

To the untrained eye, that would constitute a conflict of interest because Jack Bauer is also the buyer as well as the seller. Of course, those in the know realize that Jack Bauer eats conflict for breakfast.

Great insight. This is an interesting trend and I am looking forward to the days our (tongue in cheek) elected officials will deliver our nation to the promised land.

In some price ranges in my area, "distress sale" ARE the market. In higher price range, there are so many short sales because of negative equity, unless the appraisers can determine a formula for adjusting the value to non distress, which they do try, the market is what the market is.

Very interesting and we need to talk more about these matters.

Paul...

Interestingly enough. I understood every word and you deserve that gold star. Excellent post :)

TLW...ROAR!

Oh true so true......its seems to me a more or less if not redundant role these days...definitely one that needs to be recalibrated...

Can you say "short sale"? It's terrible but true. I pray the entire U.S. market will stabilize sooner rather than later and straighten itself out.

They must have used Zillow as a reference.

UPDATE: added trawling to the list. (this may be released tomorrow fyi ) :)

I've had lenders ask for no REO comps to be used. I've had lenders ask for REO comps to be used only if REO sales are influencing market value.

When there are only a few REO sales, they are not necessarily affecting market value. As the number of REO sales increase, their effect on the market values also increases. Appraisers using REO comps may have to explain why REO comps are and should be used.

In many cases, in this market, it is wise to use both REO and non-REO comps.
Where REO comps are predominant, such as your area, I can't imagine an appraiser not using them as comps.

Hi Paul... You have clearly hit the nail squarely on the head with this post. I have been telling people this exact thing for months now, but not nearly as concisely and completely as you have written it. I may just have to direct them to this post since you have set it all out so wonderfully! Thanks!

Hi Paul, I had to come back and congratulate you on the Featured status of this most worthy post. This is really good!!!!!!!!!!! And I have learned from you what makes a Featured Gold Star Post and know how to spot them. With business a bit off do think I could get hired by AR to moderate, LMAO?

Paul, the appraisers around here are now taking into consideration the prices on listed properties as well, which many times are lower, or much lower than the latest sold comps. Our prices have plummeted so expeditiously and the rate of sales is so low, that such practice became necessary. That's why short sales are not worth it in this area: by the time you get one approved, the offer price which seemed so low four months before, when you initially made the offer, is no longer such a bargain...

Good post! I re-blogged it!

Thank you!

Jim, I hear you, buddy.

Lenn, that is precisely what I tell confused homeowners when discussing value. If the only thing selling in your neighborhood are foreclosures and short sales, guess what? That is indeed the market. Those sales indeed set the neighborhood values. Some want to go back 10-12 months to find the last straight resale transaction, but it doesn't work that way, even if you adjust it for some generic price degradation percentage. Value is based upon what is selling at any given time, and most of what is selling out here is the cheap stuff. I don't like being the Grinch, but this is what Christmas brought our market this year.

TLW, I came down off my high winded horse for a subject that is a bit more direct in nature than my usual ramblings. Thanks for checking in and get well soon, okay? :)

Liz, it's an interesting phenomenon where the buyer tends to be more cautious than the appraiser. The buyer has crawled through the mud to sift through all of the foreclosures, short sale, resales, etc to find the very best value. The appraisal almost does feel redundant presently. Show me the buyer who is paying more than market value right now.

Kelsey, it will happen sooner if we stop deluding ourselves as to value. Once we all accept that our homes have fallen further than we would have ever thougt imaginable in such a short period of time (sweeping generalization alert), the resale home will become competitive in the marketplace again. That's when we start digging out in my opinion.

Victor, who doesn't love wonderful instant evaluation tools that are rooted in voodoo? Oh yeah ... me.

Paul - If appraisers are doing this in any market, it is unprofessional, plain and simple. Sorry to hear that you're having to deal with this kind of garbage.

Actually appraisers are making happy buyers in my area. Instant equity is the lastest trend here. The comps haven't caught up to the most recent price dive. Oh how I want to see SOMETHING move upward.

Paul, My area like yours is nothing but REOs and short sales. These are what are selling and these are what the appraiser will use as comps. Of course it doesn't really matter as Mr and Mrs Average Homeseller don't have a chance in heck of selling in my market.

Don, your last sentence sums up my thoughts quite succinctly.

Steve, thank you. I think it is a growing issue that isn't being talked about, at least not locally. I looked at an amazing short sale listing with a client yesterday. Over 100k of renovations and the seller, a flipper, just got caught holding it at the wrong time. If this were a resale home, it would most likely be listed in the 500-600k range. It's currently listed at the bank approved price of $375,000. It's a steal, but guess what? Only the steals are selling. The steals are the market to the extent that you can't even really look at them as steals anymore. I don't see how this home, when it ultimately sells, might not be used in the evaluation of home in the same subdivision simply because the bank is taking a loss. That means absolutely nothing to the buyers who will ultimately determine what sells and what does not. Does not compute.

William, thank you, my friend. I would put in a good word for you as a moderator if I didn't think I would tarnish your standing in the community by our association.

Mirela, that is an excellent point. If the market continues to descend, that short sale home may very well not be worth what the buyer is offering by the time the bank approves it 4 months later. To date, most such prices in my market have been so far below the standard resale properties that it hasn't been a factor (still a deal after waiting all that time for a response), especially with the lowball offers that are being submitted. It is something to consider moving forward, however. Thank you.

Jason, it certainly seems an odd approach to me. I think it ultimately harms those who believe their home is worth a great deal more than a buyer would actually be willing to pay in this current market. Not that many people are taking out HELOC's with their new appraisal (many banks are not even offering them at present), but they still might make purchasing decisions and other financial plans based upon dubious equity.

Tammy, I've never seen more appraisals come in higher than purchase price than they are now. It's often laughable as a home may have been on the market for a year to finally command the sales price.

BB, sad but largely true. If a resale is going to stand any chance at all of competing in this market, it has to be priced like an REO or short sale. Not like one that is a complete bombed out wreck mind you, but like those of similar quality and condition. If that's where you have to price a home to sell it right now, guess what? That's its current value. This stuff is really not that hard.

As with many other comments, the market in many areas here in Orange County is distress sales. They are no longer the exception and must be considered in the appraisals.

I see a danger with the companies that assign appraisers so the lenders don't hire them directly. Recently had an appraiser call me for info on a recent listing I had sold. She was doing comps and trying to find a similar home. She was from 3 counties away and had NO knowledge of the area.

My sold listing was not a good comp for several reasons: different suburb, different builder reputation, different tax issues. If she would have used my listing as a comp, she would have greatly undervalued the home she was hired to appraise by $200K. I obviously don't know how it came out.

In our area we are seeing more short sales and foreclosures than before, but they do not drive our market and we are not seeing them as a problem with the appraisers right now. This could change if our market continues to decline and more folks lose their homes.

We have been extremely lucky with foreclosures not dragging down values too much but we have seen appraisers taking into account seller paid closing costs.

Recently I had Sellers call me and say that their property was recently appraised for X amount of dollars, and wanted to sell.

Great!

However, I come up $200,000 less on my CMA.

Good greif~

I have looked at this property and the comparables (same neighborhood, same style, approx. sf, approx. age and upgrades ) from every angle, I am not finding anything to support that this home is worth $200,000 more. --- None of the comparables were distress sales.

Even a realtor has their (comparable) home up for sale just a few doors down. It has been on the market over a year, and is priced $100,000 less then what these Sellers think they are going to get.

I have told the Sellers all this...

I guess the next thing is to ask the seller if their facets are 14k gold.

---I have not seen the actual appraisal, and wonder if it really exists.

Gosh, I love real estate!

I had an appraiser use a tittering foreclosed property as a comp on a victorian and it messed up the process big time. And when asked why he used a distressed sale that was heading to the bank chopping block within days, he argued up and down that that was not a distressed property. I had sold it and had cued him in when helping him find apples and apples solds to make his job easy, quicker. And this place with ten foot pole marks had asbestos, heating system issues and was stigmatized on top of it all from a tragic death of the owner who's destroyed vehicle was left in the barn for all to see. The right comps and competing listings work..the wrong ones or swayed loyalty or being just lazy or unfamliar with the local market makes the straight line crooked. Appraisers far far out of their normal market that are looking at their watch, in a hurry to skedaddle home hours away are not an aid in the valuation figuring either. Up or down opinions and not accurate. Now we need a second appraisal if the bank will allow and Mr Sellers says don't lhang the cost of that next one on me. Good detailed post!

Christine, ditto.

Elaine, know what that reminds me of? REO agents who handle listings all across the county. Banks are too preoccupied with their "preferred" third parties to realize they would be better served to parcel their appraisals, BPOs and listings out with a keener eye to geographical specialization.

David, this may sound strange, but I actually sympathize with markets like yours because I think we just found the bottom of the stew pot sooner. Now that the wheels have fallen off our value wagon completely, there has been the bottom feeding investor demand that we hope will kickstart the recovery.

Michael, that's where it started for us, too. Hopefully your local waters won't grow as murky as ours did. One interesting thing about our market is that our huge crash was predated by a huge uptick. Essentially, we are to the point where it's tantamount to the last 4-5 years not existing. Wipe both the spike and the crash off the books. The markets I worry the most about are those that have gotten crushed by this economy while never experiencing the steady price up beforehand. It will take forever and a day for those communities to dig out of the rubble.

This is indeed a very complex market which continues to get more complicated as more regulation gets added to it in terms of appraisals.

Ruthman, that isn't an appraisal. That's a carnival act, and it seems to be a burdgeoning problem in many places. If that seller can't face the new reality, and doesn't really need to sell, he/she should be a bystander in this market.

Andrew, now that's completely on the other side of the spectrum: an appraisal using a distressed property when the physical condition was actually substandard to a non-distressed one. I must confess to a certain degree of sympathy. Appraisers are in a tough spot right now.

Mark, every new wrinkle holds unintended consequence within its folds. I worry that this doesn't become a means of artifically propping up a market segment. I'm tired of artificial. Back to whole grains and leafy carbs with us. Doesn't taste quite as good, but it's the road back to health.

That is something that confuses me... How can a similar house selling in the neighborhood not count? Oh, that one was distressed... well, the buyers don't care. Condition...

Lane, I'm not sure when the term "foreclosure" instantly translated to "distressed," at least in terms of evaluative measure, but there is little disputing that the turn has been made. Do we start assessing all seller motivations when we value the product now? That's the part I don't get. This segregation doesn't necessarily have as much to do with physical condition as financial situation. And that, my friends, should have absolutely nothing to do with the price of beans in Uganda or the fair market value of a similar home.

You couldn't pay me enough to be an appraiser right now. I can only imagine the "crap" they have to go through...ouch! I do think appraisers serve us MUCH better when they know their market, just as a Realtor can perform better when familiar with THEIR market. I don't understand why some lenders insist on sending appraisers from outside the area...paranoid?

Luckily in Huntsville, Foreclosures are few and short sales are few. I sure hope it stays that way. I do think some buyers perceive foreclosures as not being taken care of...whether it's true, or not.

Paul.

Another well written post..And, something I also love to see here on Active Rain is the range of opinions from the commentors based on the area of the country they come from.

I do agree however that foreclosure does not equal a distressed housing situation, and feel that we need to be sure to be ever aware of how important it is to have knowledge of the local situation.

Best wishes

Appraisers are the ones that we seen to have a love hate relationship with. Some just love to have them..

My area too is very REO and short sale driven. It's nearly impossible to find a closed comp in the last 6 months in any neighborhood around here that isn't distressed.

This will hurt for a while to come, but who can blame them for being conservative in the aftermath of this huge banking mess....?

Julie, the problem is that the practice is actually not a conservative one. In fact, I believe it to be a dangerously liberal practice to toss out comps that would make good appraisal fodder. Think about it. If an appraiser overvalues a property by 100k because he tosses the cheaper comps in favor of less directly comparable sales, that is the furthest thing from a conservative practice. It artificially inflates opinions of value. The bank's (in cases of refis), the seller's ... gives me the shivers thinking of the possible ramifications.

FYI - "conservative" and "liberal" is not intended to reflect political ideology in this instance.

Roland, okey dokey.

Mike, good to hear from you. Today's foreclosures are not your father's Oldsmobile. While there are certainly some that are in disrepair (as is true of resale properties, as well), there are others that have been upgraded to the hilt. You just can't toss a property because it is either a foreclosure or resale without assessing its actual physical condition. Financial condition should not be part of the equation.

Elizabeth, most people that I come into contact with have the same perception of foreclosed properties, but it isn't always the case. Many times the appliances will be gone, but that shouldn't make it worth hundreds of thousands of dollars in the eyes of an appraiser (because it has been lumped into the distressed category).

MAR

Paul, I have gone round and round with folks on this. In our area, the appraisers ARE using the foreclosures in their appraisal. Some Realtors who list too high will tell me no and then it comes back with them in it. Just because the Realtor says they aren't doesn't mean a darn thing.

At that point we either find them a new house of condo or the seller adjusts downward.

You are right the sellers perception of value has nothing to do with bank owned or resale.

The gap in price a normal seller wants and a bank owned property is going for is pretty wide in my area...so appraisals are an issue...

I would think that an appraisal of a property that is in a foreclosure neighborhood wood be done without allot of consideration to sold comps of the forclosed property. To me that has more to do with the seller / bank situation. I would put 90% of the infuses on the replacement cost and depreciation. I am wrong in that thinking?

Foreclosures will affect the appraisals until we get through this current market. A smart appraiser takes all factore (including distress sales) into consideration. Most of us are seeing appraisals all over the chart!

I didn't realize this could be happening. I had an appraiser call on a sale we're working on and he specifically asked if the property is bank owned or not. I wonder if that's why.

Going out of order to address Craig's comment. This problem I see with that approach is the mythical "foreclosure neighborhood." What does a foreclosure neighborhood look like? In my market, it's not only the historically downtrodden areas, but the picket fence communities, condos, etc. It has touched every segment and cross section of our market to the point that you can no longer isolate areas that have been affected by foreclosure versus those that have not. It's everywhere. From the sub $100,000 neighborhoods to the multi million dollar neighborhoods. The comparable sales approach is still best, in my opinion. My only contention is that the directly comparable sales should be used (weighted for physical condition as is typical, of course) regardless of whether they are corporate or personally owned.

Appraisers are "supposed" use as comps, properties when neither the seller or buy were under any undue pressure to buy or sell.

Of course the problem is that in some markets "everyone" is under undue pressure to sell. What then?

Norma, makes for quite the dilema, doesn't it? If the only properties moving are due in large part to undue pressure, those values set the market.

Erica, I'd bet twenty American dollars that is precisely your appraiser wanted to know that.

Bruce, true. I've seen too high, too low ... everything.

Chuck, the problem in my market is that there is the same huge gap, only the resales that aren't priced in accordance with the bank stuff aren't selling. So what are they worth?

Missy, it's a problem. I don't even really intend to single out appraisers for the growing disparity between assumed value of a resale home versus a bank owned one. It is a misconception that has permeated society at large. Of course, our industry should refrain from fueling that misconception with unreasonable assignments of fictitous value.

Nice post.... and what is even worse is when national appraisal evaluations get involved, as what pops out of some so called appraisers computer in another state is taking precedent. The last I had was 13% below the appraiser evaluation. We are going to have to deal with this for awhile......but in time, we will be back to a free market....hopefully.

Your post is on the money, but my beef with appraisers when the market was booming was the first questions that was ALWAYS asked, "What is the sale price of the home?". I always have had a problem with this as they new the number that they needed to hit. If an appraiser was doing his job he shouldn't need to know what the house was being sold for as his job is to put a value on it based on current market conditions.

For the Tulsa market, I would say that you can make a case for the two tiered market and appraisals, kind of like retail and wholesale.

According to Realtytrac, Oklahoma is 37th in the nation in the rate of foreclosures, Arizona is 2nd behind Nevada. In Oklahoma, a lot of buyers don't want to and can't buy a foreclosure. The reason is the repairs that need to be done to meet FHA standards so that the buyer can get a loan. So many foreclosures are left to investors who buy, fix up and resell and need adequate margin so that they can do that. In order for that to work, the home has to be at wholesale prices and be appraised appropriately.

Now when a market reaches a point where there are so many foreclosures that it becomes the market? You are right, if there are a lot of foreclosures in AZ that are in adequate condition and comparable to a regular resale, it's hard to make a case for appraising these differently.

Peter, you said it all with your last paragraph. It comes down to separating condition from ownership status. We are so inundated with foreclosures and short sales that we see all manner of condition in such properties, not just the dumpers that are normally associated with the red headed stepchild of the market. As noted several comments up, it bears repeating that the motives and hardship nature of such sales should be less of a factor in the eyes of the appraiser in a market such as mine. It's essentially the only game in town in terms of what is selling at a regular clip, so we can't continue to ignore the values of these "lesser" sales as buyers have shown an unwillingness to pay the higher prices of the "market value" resale homes. Market value is what someone will pay today, and no one will pay what a lot of appraisals are telling people their houses are theoretically worth.

The Las Vegas market is about 35% REOs and 35% short sales. I like to think that if we can get to a point where distressed properteis represent less than 15% of our market that we'll see a bump in the price of regular sales. Until then we just remember that 'we don't make the market, we only work in it.'

Not sure if a similar scenario was mentioned in all of the above, but I am dealing with a resale that is being measured against a subdivision so imcomplete that it does not have FHA financing available. Prices have plummeted there. (It's a small town and school district.) Does that mean that my FHA ready property must suffer the consequences of the fire sale going on there for the elusive conventional financing buyer in Michigan? There just are not that many of those gems around. The first appraiser offered a verbal, "It will never appraise," but the second appraiser said there were plenty of recent comps to support the sale price. I echo one thought above - you couldn't pay me enough to be an appraiser these days. I'd be quaking in my boots.

MAR

Glad you realtors are finally starting to get it. hehe!

I'd like to add that real estate IS local and a good appraiser uses market analyis to determine which comparable SALES are most appropriate to use for the appraisal report

PS. Appraisers aren't supposed to be trying to support any value as mentioned in post #55. My blood boils when I read that kind of thing but unfortunately most appraisers won't get any work if they don't play that game. Very sad that this is still going on.

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