Appraisers are Killing Sales

By
Services for Real Estate Pros with Heaton Dainard

 

appraisals

With tough loan underwriting guidelines, a market saturated with distressed and bank owned inventory, and reduction in loan programs, selling a home is no walk in the park. Imagine the relief and joy of a homeowner when they do get an offer or even multiple ones? However, the days of celebrating an offer are long over. Homeowners face a new, even bigger problem: the appraiser.

 Appraisers are coming in way below purchase price and killing a sale on the spot. Homeowners can do everything right to get the house in shape for the market from remodeling, staging and making sure it is in top resale condition. “Getting a house in prime condition pays off. Buyers will pay for quality. They will pay for a home that needs no repairs and will not need repairs for years to come, ” says James Dainard, a real estate agent that specializes in helping investors buy, fix up and resell properties for top dollar in this market. “I have seven years of experience buying and selling property and know how to get a property in a condition that sells it quickly. We know what upgrades will get buyers drooling over your property.”

“We have had five, yes FIVE, appraisal issues in the last 30 days and over twenty in the past six months. Two of the properties had multiple offers with escalation clauses on the first weekend. My question is this:’ if properties have multiple offers on them the first weekend and the property sells for over list price, isn’t the home worth it?’ I believe that with the amount of inventory on market, buyers are not in the mindset to overpay,” says frustrated James Dainard of Invest Now LLC in Bellevue.  (www.investnow.net a full service real estate investment firm)

Basic economics says that the value of anything is what someone is willing to pay for it. How can you explain a situation where a home gets multiple bids the first week on the market and the appraisal comes back significantly lower? This isn’t an isolated situation. In a recent Wall Street Journal survey, 47% of readers who participated said that they had personal experience with a low-ball appraisal.

It’s harder than ever to get approved for a mortgage with stringent credit requirements and a conservative amount required as a down payment. That’s not a bad thing, but the appraisal must be accurate to stabilize the housing market because the bank won’t loan more than the appraiser says the home is worth. This means that the buyer must contribute more cash in addition to the conservative down payment or the seller must significantly lower the price or the deal is dead.

The current economic conditions are a big enough task for sellers in this market but now they have to deal with appraisers just trying to move on to the next task or house to devalue. The irony is that in the past appraisers were blamed for overvaluing homes so that banks could lend more money. There has to be a middle ground, because right now, we are in a buyer’s market. If a home gets an offer, you can bet that the buyer is not paying over market value.

The Federal Reserve Board replaced the Home Valuation Code of Conduct with new requirements that prohibited banks from hiring their own appraisers. Now banks outsource appraisers using an appraisal management company, which are generally units of other banks or finance firms. These management companies take a large cut so appraisers are under the gun and forced to work quickly instead of investigating all of the components of a home thoroughly and accurately. In addition, a large part of this problem stems from appraisers’ lack of knowledge of construction and upgrade costs and what buyers actually want to pay for. They are comparing bank-owned and short sale inventory homes that need substantial amounts of upgrades to homeowners selling well taken care of completely remolded properties—oranges to apples. The management companies are also sending appraisers over too wide of territory so that they don’t even have any knowledge of the area. How can an appraiser give an accurate number if they aren’t familiar with the neighborhood? They are missing the nuances that mean a lot to homebuyers, like the safety of a particular community, or making big mistakes like comparing a lakefront home to a nearby, less affluent home situated on a pond.

 In this current down economic climate, we need to come up with solutions to help us recover and get back on track. We will simply not have any recovery in the market with this ongoing issue. Appraisers are absolutely killing home sales.

Has anyone experienced this? Please comment or write me at meredith@heatondainard.com

Comments (81)

Tatyana Makarov
Coldwell Banker Residential Brokerage - South Windsor, CT
Your Greater Hartford Area Realtor

Thanks for the post...

It is a sad reality. I am wondering if market will ever turn around...

Nov 12, 2011 09:58 AM
William Johnson
Retired - La Jolla, CA
Retired Real Estate Professional

Hello Heaton, If all this was not bad enough there is a bill before Congress to add something new to the mix. Energy efficiency and the appraisers will be required to factor in Energy Efficiency into the appraisal valuation if the bill passes. What's worse is that it is co-sponsored by members of both sides of the isle. The bill uses the term "reward" but we all know how that goes if this becomes law. 

Nov 12, 2011 11:07 AM
Leslie Ebersole
Swanepoel T3 Group - Saint Charles, IL
I help brokers build businesses they love.

Ardell #60 may be on to something. From the author's profile:

"Full Service Real Estate Brokerage We help investors buy, flip, sell or create cash flow for highly discounted real estate properties."

Are they getting hit on the flip? Must be. 


 

Nov 12, 2011 11:41 AM
Kate Akerly
Kaminsky Group - Manhattan Beach, CA
Manhattan Beach Residential Sales

I keep reading about how much of a problem this is around the country.  We have yet to have an appraisal come up short in any transaction.  That being said, we don't have the foreclosure problem that everywhere else seems to be experiencing.  It seems like this is a very difficult problem to solve in the industry.

Nov 12, 2011 01:32 PM
Steven Pahl
Keller Williams Tampa Properties - Tampa, FL
Real Estate Consultant Tampa, FL 813-319-6423

I would have to agree with Ardell (#60) and Leslie (#71) that if a house is purchased at $XXX and then re-marketed at twice that price a few months later it is not an appraisal problem.

Nov 12, 2011 02:23 PM
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

Heaton - I didn't check out your profile before commenting and now that I have, I have to agree with Ardell that appraisals on flips is a whole other matter than appraisals on regular equity sales.  The issue that I mentioned in my previous comment is one that is one that we've had here in Los Angeles & Ventura counties for a few years now - appraisers valuing totally remodeled, upgraded, move-in ready, equity sales (not investor flips) to the run-down, dilapidated, dumpy, REO model matches down the street with little to no value adjustments.

Investors buying bulk properties wholesale and flipping for 100% mark-up are going to need to justify and validate their sales prices with two lender required appraisals and the property still needs to be based on recent comps.  Granted, in accordance to UAD, appraisers are going to need to document property features and upgrades and superior property conditions and they can not value superior equity sales to inferior REO dumps with no value adjustments.

Nov 12, 2011 04:16 PM
George Bennett
Inactive - Port Orford, OR
Inactive Principal Broker, GRI

I'm glad I came back to check the new comments. You have generated a very good comment stream.

Nov 12, 2011 05:17 PM
Craig Cooper
Chase International Real Estate - Tahoe City, CA
Creating-Preserving-Growing Wealth in Real Estate

I want to echo William Johnson #70... You ain't seen nothin' yet! Wait till they start evaluating all the green features, and energy saving devices in a property and make significant value judgements based on how much your light bill or heating bill generates in fees... this and some other ridiculous ideas better be stopped or you will see values continue to erode for many years to come.

Nov 12, 2011 08:06 PM
Keith Lawrence
Christie's International - Mahwah, NJ
ABR, SFR

Appraisal are important part of the real estate transaction.

With bank owned and short sales appraisals come in too high.  Regular transaction they come in too low. 

 

Is there a happy medium for appraisor to price properties at for today's market.

 

Nov 13, 2011 12:31 AM
Bob Miller
Keller Williams Cornerstone Realty - Ocala, FL
The Ocala Dream Team
Nov 13, 2011 01:55 AM
Trey McCallie
Tate Daniels Concierge Real Estate - Lexington, KY
Excellence in Real Estate since 2003

We are having lots of issues with appraisers coming from outside our market area with little knowledge of neighborhoods and trends.  It is very frustrating.  Then we can't discuss their poor work with them.  It is a struggle to challenge these appraisals.  The pendulum has swung too far in the other direction.  We are being punished for the fraud committed in other major metro areas during the boom.

Nov 13, 2011 03:18 AM
Jennifer Manchester
Suburban Properties of Charlotte, LLC - Mint Hill, NC
GRI, ePRO, ASP - Broker/Home Stager

I have had issues with appraisals coming in low this year in my market. My experience seems to be mostly with the big banks, I rarely if ever have i had an appraisal on a loan originated by a mortgage broker come in ridiculously low.  It always seems to be one of the big banks.  Good luck challenging these appraisals, the bank does not want to hear it, the buyer walks and it makes the brokers on both sides look like they do not know how to price a house or advise a client on making an appropriate offer.

Nov 13, 2011 07:36 AM
John Hopkins
Nakoni Appraisal - Renton, WA

Jennifer,

How true.  With most big banks owning their own AMC, the AMC is a profit center for the bank.  They are typically the AMC that hires Skippy from the next county, pays him the lowest fees and demand the fastest turn times.  The AMC does not care if the appraisal is good, they have a built in client base. They are not guieded by customer service as are some of the smaller AMCs that need to produce credible appraislas to keep there customers.

John 3

Nov 13, 2011 07:53 AM
Anonymous
Ron

I am a licensed Real estate Broker as well an a Certifeid Residential appriaaser with 25 years experience. In reference to this article, it is blaming the wrong party. When agents do not measure a property and guess at the square footage or rely on an inacurrate data, fail to perform proper market analysis and over price properties what do they expect? A qualified appraiser shoulds always consider the contract price and the fact that you have a willing seller and buyer. However, the appraiser must use the most recent and best sales data available. When there is an incease in active lisitngs buyers typically lower their prices to compete in the market resulting in lower priced sales comparables. These sales set market value in the area. Appraisers were blamed for overvaluing properties and now are being blamed for undervaluing properties. An appriaser can only use the comparables available as created by the market. I have a suggestion to agents, when you perform your market analysis, first of all measure the property, look at all sales not just the highest sales. Compare similar properties, look at the most recent sales, look for trends, there is more to pricing a property than just pulling the sales in the area and averaging the square footage prices. If your appraisal comes in low don't always blame the appraiser, ask yourself if you performed your due dilligence. One final suggestion, hire an appraiser for a pre-listing appraisal. As for the AMC's, most but not all of them, hire the cheapest appraiser thay can find. Good appraisers are being driven out of the market. This is another great gift of our government, the HVCC and now the DODD/ FRANK Act. Instead of fixing a problem, they have created a bigger one. No easy answer but there is also not one party to blame, all must shoulder the blame and in my opinion, uneducated and unqualified agents are a big part of the problem.    

Nov 13, 2011 01:41 PM
#75
Patricia Beck
RE/MAX Properties, Inc., ABR, GRI, SRES - Colorado Springs, CO
Colorado Springs Realty

I think pre-listing appraisals as the previous commenter recommended are a good idea, especially with a home that has had extensive upgrades.  I wouldn't like to be an appraiser in this market.  Great discussion here.

Nov 13, 2011 05:31 PM
Hank Miller
Harry Norman Realtors - Alpharetta, GA
Associate Broker & Certified Appraiser

I earned my SRA designation in '90 and remain an active certified appraiser (foreclosures only) as well as associate broker. The disconnect between agent and appraisers continues to baffle me.

Why would an appraiser "kill a deal"? Do agent think they're out to get them? What is so hard to understand about how an appraisal is completed? Remember this:

1. a comparable is a reasonable alternative to the subject.
2. only closed comps are considered, those should be within a mile (or other defined competing area designation), closed within 6 months but not more than 12
3. the cost approach doesn't matter, the income approach doesn't matter (for residential homes)
4. a market condition summary is required
5. if you want to contest a value, get comps (closed) that meet the proper criteria; don't waste time with garbage.
6. if you want to ensure your opinions are known, leave a packet for the appraiser with comps, data, and whatever else you feel important

and because it's critical - UNDERWRITERS - frequently automated or by folks distant from the job - will sharpshoot everything. They are looking for anything that doesn't fit into the box - and in this constantly changing market, nothing does!

The appraisal industry is a mess, HVCC drove many experienced ones (including me) out of the "lending" side. It's largely based on fees so you are likely to get a dummy - so speak the language and make it easy for the dummy! If you know so much, hand them that packet and make everyone happy.

But for God's Sake - if the closed sales don't support the value there's nothing the appraiser can do! Trust me, no one wants to hear you snivel about an appraisal - especially an appraiser that has to respond to it.

 

 

 

Nov 15, 2011 09:42 AM
Heaton Dainard
Heaton Dainard - Bellevue, WA

Thank you for all your feedback to our Appraisers are Killing Sales Post! We welcome the discussion and look forward to new responses.  Here was our initial post that many of your followed! 

 

http://activerain.com/blogsview/2588573/appraisers-are-killing-sales-

 

So now I must ask: how can you say with such certainly that what someone paid for a home dictates what it is worth when it is completely fixed up? 

 

It shouldn’t matter if an investor purchased a property for a dollar, does the repairs and renovations, and resells it for $300,000. If $300,000 is the value of the property, that’s what it should sell for. What someone paid for it is irrelevant.

 

The problems we are having are not properties that we simply put carpet and paint in, these are properties that we have done a substantial amount of work to and have been completely redone or regutted. We are talking, electric, plumbing, roof, windows, granite counters with new solid wood cabinets, etc ... We do quality upgrades that take a substantial amount of time, money, and effort.  We have the highest quality contractors. Our upgrades are things that homebuyers are WILLING to pay for and want a move-in ready home. 

 

In addition, we are not asking above top dollar pricing. When our clients buy a home to fix and flip, we already have done the back end work to make sure the property will sell for a profit. We have done a full CMA and are not simply making up high prices to put on the market. Overpriced homes don’t sell, but well priced quality homes don’t.  Our investors are want to sell homes quickly and in this competitive market, that is not feasible if a home is overpriced. 

 

The problem with these appraisals is that appraisers (not all) are putting in the first 5 houses they pull up no matter the condition or situation.  Reading the initial blog post, you will see perhaps why appraisers are making such big mistakes.  They are under the gun, working for less money than ever with less time than ever and required to work over broader regions that they lack the knowledge of. The market has changed and there are far more distressed properties on the market right now.  Appraisers may lack the experience and knowledge to evaluate quality upgrades and appraise properly. 

 

 I just had a appraisal come in low where the appraiser had 4 of the 5 comparables were distressed and NOT updated properties. Yes, the properties had the same bed, baths, and around the same sq feet. But they were lacking over $50k in upgrades. When we disputed the appraisal (which luckily got corrected and the value of the appraisal went up 25k) I pulled  ALL remodeled properties in a mile radius of the house. There was not one comparable that was fixed up in a mile radius that was sold under $335k. Ours was pending at $320k (we were the lowest pending fixed up house for sale, so the statements above that reference us overpricing property, is again, irrelevant).  This is not a fluke story, this a monthly problem for us.

 

Appraisers should appraise houses that are apples to apples. They can’t continue to compare remodeled houses to fixer bank owned and give minimum credit to the value of the property. If a property has had over a $70k remodel, bumping the value “+10,000” from the purchase price isn’t going to cut it. If we can’t get this problem sorted out, we are in for a long painful real estate market.

 

Here's an example of what we do at Heaton Dainard LLC. 

 

This is a property we found for one of our clients, a local real estate investor.  We guided him through every step of the process by helping him find a highly discounted property in the area he was targeting, securing financing that could be used for the rehab and purchase, referring our network of trusted contractors that we knew would be able to stay in his timeline and budget and make rehab decisions that are necessary and homebuyers really care about and made sure he had a top agent that has enough experience doing CMAs to price the home right the first time so it would be attractive and sell quickly. 

 

Now look at the initial property and then look at the renovated pics.  Can you see the value in our renovations?  Can you see why the after house would be more attractive and command much more the "before" house did?

 

https://picasaweb.google.com/investnowllc2/BallardNW67th

 

Let me know what you think!

 

Thanks for the feedback and keep it coming.

 


Warm regards,

 

 

 James Dainard

Nov 17, 2011 04:48 AM
John Hopkins
Nakoni Appraisal - Renton, WA

James,

Thank you for updating this post. I did look at the link to your pictures; I also pulled up the house on NWMLS.  You did a very nice job.

In your last post, you make some very valid points.  What you pay for a house should have no effect on the value when you sell. 

But, if the above is true, so is the concept that what you spent on rehabbing does not always equate to added value.  Steve Roake had a good post entitled Separating "VALUE" from "SALEABILITY.  This is critical when rehabbing.   Thousands of dollars spent on landscaping, decks, appliances (particularly fridges & W/D) never return dollar for dollar.  This is also true for updating/upgrading or replacement of mechanical systems, such as heating, plumbing, roof, electrical or insulation.  While they do affect condition, quality and effective age, for the most part they are expected to be updated.    Also, since that information is not disclosed on the MLS for the comparables it is impossible to make specific adjustments.

 Here are some things you might consider to aide in the appraisal process. 

1.   Meet the appraiser at the home.

2.  Provide him with photos (not to many) of the before and a list of what was done in the rehab.  (A total price does not hurt, but individual prices are not wanted. This helps explaining things to the underwriter)

3.  Offer to email him the pictures and list.  (Easier for him to use)

4.  Provide 3-5 good comparables.  No, More.  (Recent sales within 90 days, 6 months at most, similar in size, style, age, site, within ½ mile, 1 mile at most, some that sold for less than subject, some that sold for more)

While not all appraisers will appreciate this, most will.

Finally, remember what does affect value, especially location.  The best Silk Purse surrounded by Sows Ears is not as valuable as a good Cloth Purse in the middle of Silk Purses.

Hope this was helpful and hope you have better experiences in the future.

John 3

Nov 19, 2011 05:17 AM
Sylvie Stuart
Realty One Group Mountain Desert 928-600-2765 - Flagstaff, AZ
Home Buying, Home Selling and Investment - Flagsta
Appraisals can be a big issue with a transaction. We have been getting a lot of out of town appraisers who don't know the area and are trying to pull comps from uncomparable properties. It's important to make sure your appraiser knows the area, too
Jan 16, 2012 12:23 AM
Matt Robinson
Professional Investors Guild - Pensacola, FL
www.professionalinvestorsguild.com

I'm a little late to this post, but yes I have experienced this problem, much more on high LTV loans like VA & FHA than on conventional.  I do a lot of rehabs (fix & flip), so we are always struggling to try and show the appraiser why it's worth so much more than we bought it for.  We are almost always the NICEST house on the street, and 10% BELOW recent comps, and yet the appraisers just have a hard time believing the house is worth $50,000 more than I paid for it 60 days ago.

And even on my non-flips, appraisers are keeping prices down.  They get so much pressure from the banks, that they are over-cautious.  How then do we ever recover?  How do prices ever go up, even if buyers are driving them up, when appraisers continue to knock them back down?  It will definitely be an issue moving forward.  I wonder what the Case-Schiller home price index would do if there were no appraisers?

May 04, 2012 02:54 AM