When speaking at Portland area real estate offices, I often hear horror stories about appraisals coming in at just one thousand dollars or so below the contract price of a property that is being sold for several hundred thousand dollars. This difference, often less than one percent, is beyond typical appraiser accuracy but it results in a big hassle for all parties involved who now need to decide if they will bring more cash at closing, cancel the contract, renegotiate the contract, ask for a second appraisal, or dispute the appraisal. Here is my take on why this occasionally happens and the top three things a real estate agent can do to help avoid the situation.
Appraisers are highly trained and regulated to be independent and unbiased third parties. Most appraisers around Portland know a colleague who has been disciplined by the state appraisal board and most appraisers are terrified to do anything that might suggest that they are biased. This feeling of fear can, at times, become misguided and cause some appraisers to reconcile an opinion of value that ignores the contract price and the limits of the appraisal accuracy when working with imperfect or incomplete sales data.
A very small percentage of appraisers falsely believe that the appraiser should estimate a value and pretend that the contract does not exist. I once had a reviewer say to me, “You reconciled giving some weight to the contract price. What approach to value is that? I’ve never heard of a contract approach to value.” This logic does not take into account why an appraiser looks at the contract of sale for the subject and how pending sales and active listings relate to the sales comparison approach to value.
In a real estate appraisal for a typically-financed home sale, appraisers will be given a copy of the sales contract to analyze. The contract price is not proof of market value, but it can be an indicator of value. The main purpose of the appraiser’s analysis is to determine to what extent the contract is an indicator of value. Typically, if the contract price was negotiated after a property was exposed to the market and the buyer and seller are unrelated and disinterested parties, then that contract is probably a strong indicator of value for the subject. The appraiser can give this contract price some weight in reconciliation of a final value as long as it is reasonable to do so within the context of the other value indicators.
Here are the top three things a real estate agent can do to help ensure that the appraisals do not come back slightly low.
Following these tips should help eliminate a few frustrating closings, but it is still up to the judgement of the appraiser. Sometimes buyers pay a little too much for a property and it is perfectly acceptable for an appraiser to come in slightly below the contract price after analyzing all of the evidence. The important thing to know is that most appraisers do not want to cause trouble and will work very hard to make sure they are right before sending off an appraisal that is sure to become a lightning rod because it is slightly below the contract price.
Did I leave anything out or do you want to join in the conversation? Let me know in the comments below.
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I regularly speak at real estate offices around Portland, Oregon about appraisers and the appraisal process. Lately, variations of the following questions have been most popular:
“Are you seeing more appraisals than normal coming in below the contract price?” I do not have any quantifiable data to support it, but there is plenty of anecdotal evidence that this is true. I do not personally perform appraisals for purchase loans. However, one appraiser in my office has started checking comparable sales before accepting appraisal orders for purchases because he does not like to be a bad guy or deal with the challenges that often result from value that is below the contract price. Other appraisers I speak to are reporting similar stories about high numbers of “unsupportable” purchase prices.
“Why are so many appraisals coming in low around Portland right now?” A 2011 study by Yanling Mayer found that less than ten percent of all appraisals come in below the contract price. However, this number could be more than ten percent in Portland right now. Prices are going up particularly fast for many properties and market segments around Portland due to strong demand, very low inventory, and a sense of urgency among buyers. In addition to a hot market, this also marks the end of the seasonal spring jump when properties typically recover from winter lows and much of the annual price increase occurs in a short time. (This concentrated annual jump in prices is discussed in a previous blog post regarding the Average Case-Shiller Portland Index.) The quickly increasing Portland prices, combined with normal seasonal fluctuations can make it very difficult for appraisals to keep up. This is because appraisals are strongly dependent on closed sales. An appraisal done today might be based on the best available comparable sales that closed a couple months ago, but went pending a month or so prior to that. Even better comparable sales data might not be fully available because it has not yet closed. Market statistics for supporting market change (time or date of sale) adjustments also lag a few months behind, leaving an appraiser with estimated trends, projections, and feelings, rather than solid evidence for making a well-supported conclusion that lenders can feel confident funding a loan on. The good news is that typically price increases slow late in the summer and market statistics start to catch up with current sales. This means that there are likely fewer low appraisals for closings in late summer, fall, and winter months.
“What options do I have if my appraisal comes in low?” There are four alternatives if an appraisal comes in low on a pending sale.
Cancel the contract. The appraisal might be a wakeup call that this is not the best deal for this buyer. It might be time to find a different home to purchase.
Renegotiate the contract. Sometimes when an appraisal comes in low, the two parties can split the difference and make the deal work. However, this option can be painful for buyers or sellers.
Ask for a second appraisal. Some lenders are willing to order a second appraisal as long as there is evidence that the first appraisal is flawed. Lenders do not want to be accused of, “shopping for a value” by ordering appraisals until they get the value conclusion they want.
Dispute the appraisal. See question #4 below.
“Can an appraisal really be disputed?” An appraisal can be disputed successfully if it contains an error or if there is compelling evidence of flawed analysis. Most lenders or appraisal management companies have a formal dispute process that involves filling out a form and submitting it for review. In my career, I have had many people try to dispute my value opinions; a few have successfully convinced me to change my value. On one occasion, I thought that a comparable sale just up the street from the subject set a firm upper limit of value by being superior in most ways. However, the borrower had been in that property and pointed out some things about it that I had not been able to uncover in my research. Consequently, I was able to verify the new information and revise my value opinion. I have also been successful at disputing several appraisals done by other appraisers. The best way to dispute an appraisal and win is not by disputing the opinion, but by pointing out errors of fact and building a strong case for an alternate conclusion. Remember that a value below the contract price does not mean that the appraisal has errors. Here is a blog post on how to challenge an appraisal.
Did I leave anything out or do you want to join in the conversation? Let me know by commenting below.
A quick Google search for, “how to challenge (fight, dispute, etc.) a bad home appraisal” will bring up many articles; however, few of the articles actually indicate what makes a “bad” appraisal other than “the value opinion came in too low and is killing my home refinance, purchase, or sale.” The appraiser’s value opinion is not a factor in determining if an appraisal is good or bad, but knowing the signs of a bad appraisal can help identify and intelligently challenge what I consider to be, not a “bad” appraisal, but an appraisal that lacks credibility.
It takes years of experience, local market knowledge, and training to produce a credible appraisal. Conversely, the same are required to readily spot a less than credible appraisal but there are some indicators that a homeowner, borrower, buyer, or real estate agent can look for if they have concern that they received a less than credible appraisal.
1. Read the appraisal thoroughly. Check the appraisal facts carefully, including all of the subject property information, measurements, and even comparable sales data if that information is available to check. If the appraiser made a mistake on some of the important facts, it could result in an error of the final opinion of value. Even if the appraiser only made mistakes on benign facts, it can suggest sloppy or careless work and can bring the credibility of the entire appraisal into question. However, it is important to remember that appraisals are extremely complex and appraisers work with multiple data sources that often conflict making it likely that small errors could be found in nearly every appraisal. If you find an error, document it and provide the information to your lender for review. Appraisals with errors of fact are the easiest to challenge and the easiest to convince lenders to order a review appraisal, or a new appraisal if the appraiser will not reconsider a value opinion.
2. Examine the subject property’s listing history. If the subject is an “arm’s length” sale and was only on the market for one day with multiple offers above the list price, this is strong evidence that the subject’s list price is below market value. However, it is important to recognize that a contract price that has been pushed up or had concessions included during a bidding war might be above market value or unsupportable by the appraiser. If your property was on the market less than a typical market time, had multiple offers, and the appraiser’s opinion of value is below the list price without reasonable explanation, document this and provide the information to your lender for review.
3. Do you or your real estate agent know of any sales that the appraiser should have considered, but did not? Appraisers can easily miss strong comparable sales by erroneously entering search parameters or overlooking data that has been misclassified in the multiple listing service. With all of the information available online today, it can be easy for a homeowner to Select Comparable Sales themselves. Just remember that it can take years of practice to choose the best comparables, so do not be surprised if the lender or appraiser is not convinced of the validity of yours. Look particularly for sales of homes that are closer in overall size, condition (age, updating, maintenance level, etc…), location, and with more recent sales dates, than what the appraiser has selected. If you know of a sale and you think it is more similar to the subject than the comparable sales used in the appraisal report, document it and provide the information to your lender.
4. Look at the comparable properties to see if they are reasonable. A good set of comparable sales should have at least one sale that is superior in most ways to your property and one sale that is inferior in most ways to your property. If you line up all of the comparable sales from lowest price to highest price or least desirable to most desirable, does your home fit reasonably into this range of sales prices? It can be difficult for appraisers to get the value opinion right and support adjustments if the subject home is at the far end of the range (or worse, outside the range) of comparable sales prices before adjustments. If you have comparable property concerns, note them and provide to your lender for review.
5. Look at the comparable sale adjustments to see if they are in the correct direction. A comparable property that is inferior in some way to the subject should have a positive adjustment. It can be easy for an appraiser to mistakenly subtract when they should have added. If you find an adjustment error, document it and provide the information to your lender for review.
This appraisal example shows the subject’s site is 7,801 sf, therefore the 2,742 sf site is inferior and should have a positive adjustment. It would be a sign of a “bad” appraisal if the adjustment was negative.
6. Look at the comparable sale adjustments to see if they are reasonable. Did the appraiser adjust at $25 per square foot for finished area for a “like new” house, when the appraiser estimates in the Cost Approach Section that it costs $110 per square foot to build new? Did the appraiser only adjust -$5,000 for condition on a property that had a $50,000 renovation including new kitchen, new baths, new siding, new roof, and new windows? Appraisers recognize that cost and value are not the same. However, when cost and value differ by a great deal (typical in non-conforming properties or improvements, see Maximizing Home Value), the appraiser should be able to explain how the adjustment was supported and why it is reasonable. Some less-credible residential appraisers have been conditioned by lenders to shy away from making reasonable sized adjustments. This is because smaller adjustments make the appraisal look as though the comparables are stronger and therefore the appraiser gets less scrutiny from lenders. If you think some adjustments are not reasonable, document it and ask your lender to have the appraiser explain their market support for the adjustment in light of the big difference between cost and value. Experience alone is not strong support for an adjustment and should not be an acceptable answer.
7. Check to see that the appraiser considered adjustments for time or market change adequately. Did the appraiser just say that prices are stable without enough support for the conclusion? Was the appraiser’s conclusion for market trends based too heavily on some larger area report that includes all property types and sizes, rather than an analysis of the competitive market and similar properties? Market change adjustments are a common area for residential appraisers to shy away from because proper analysis of the market requires hard work and lenders tend to hassle appraisers more when large time adjustments are applied without detailed support. Prices rise quickly in hot real estate markets. A $200,000 comparable, that contracted six months ago, in a 12% annual appreciation, will be a low indicator of more than $10,000. This could be the difference between a low and an accurate appraisal. If you think that the appraiser did not support their conclusion to apply or not apply time adjustments adequately, document it and ask your lender to have the appraiser explain.
8. Check to see that the adjusted sales prices in the appraisal all point to a reasonable range. For example, if some of the adjusted sales prices are at $215,000 and some are at $275,000 without proper reason and explanation in the appraiser’s reconciliation, suggests that the appraiser has not applied the correct adjustments to the comparable sales or has not adjusted for all of the factors recognized in the market. A range of fifteen percent or less among the adjusted sales prices is typically considered to be acceptable in residential home appraisals, but the range can be higher with more unique properties and lower with more typical properties. If the individual adjustments are reasonable and well supported, the range of adjusted indicators can be a good indication of the confidence level of the appraiser’s final value opinion. If there is a large range of adjusted indicators, ask the lender to have the appraiser explain how they reconciled a confident opinion of value given such a large range.
This appraisal example shows a very close range of adjusted indicators from only $198,987 to $200,610. It should be easy for the appraiser to reconcile a value given this data.
This appraisal example shows a larger range of adjusted indicators, but still a reasonable range from $201,344 to $217,000. This appraiser should probably have more explaining in reconciliation as to why one area of the range was reconciled over another. However, adjustment range alone does not determine if an appraisal is not credible. A simple average of the adjusted indicators is not generally considered a credible reconciliation of the range unless all of the indicators are quite similar in adjustments and price. A more credible reconciliation of this appraisal data would be for the appraiser to explain that the third comparable (on the right) has fewer gross adjustments, is closer to the subject, and is more recent, therefore more weight is given to the adjusted indicator of Comparable 3, than the other comparables, and a value toward the upper end of the adjusted range is reconciled.
9. The distance that the appraiser travels is commonly mistaken as a factor for a bad appraisal. However, it is normal for appraisers to be experienced in a large service area. When I started my appraisal profession, I was working for a regional appraisal company and my service area was a section of the Oregon Coast that was two hours from my home in the Portland area. I would drive to this area one day each week, inspect several properties, and then spend the rest of the week putting the appraisals together. At the time, I was doing more work in the area than the local appraisers. However, my address forced me to work harder on my appraisals and to prove to the local appraisers and homeowners, who would likely be viewing my work, that I knew the market as well or better than they did. Just because the appraiser traveled a great distance to appraise your property does not mean that the appraisal is not valid, but it might be reason to look more closely to see if the appraiser demonstrated local market competency. An example of local competency on the Oregon Coast was understanding that properties west of Highway 101 tend to be vacation buyers and those east of 101 tend to be local buyers. An appraiser on the Oregon coast might travel a greater distance north or south to avoid using a property from a different market east or west of the highway. If you think the appraiser did not demonstrate market competency, document it and provide your reasoning to your lender for review.
The appraisal Company Address can usually be found on the signature page of the appraisal report, under the appraiser’s name. It is possible that the company that the appraiser works for is different than the location of the appraiser. A Quality Appraisal, LLC is located in a suburb of SE Portland, Oregon, but we have appraisers who live and work on both sides of Portland. In this case, to find out where the appraiser is from, look at their license or go to the Appraisal Subcommittee National Registry of appraisers.
Remember, most lenders and appraisal management companies have a formal dispute process for appraisers. Challenging an appraisal can be stressful for all parties involved. Most appraisers work very hard to come to independent, objective, and unbiased conclusions and can take it personal when a biased party like the lender, borrower, or an agent challenges them. For the appraiser, responding to a value dispute can mean a lost day of work to reconsider or respond and, fear that if significant errors were made, it could mean lost future business. For the lender, borrower, or agent, it can mean lost time and thousands of dollars. With all of these pressures on both parties, it is very important to challenge appraisals in a civil manner that presents facts rather than personal attacks. Revising an appraisal value opinion will require the appraiser to swallow some pride, so make sure that your value dispute arguments are well crafted, based in fact, and respectful.
If you find this information interesting or useful, please subscribe to my blog. Also, please support us by making Portland real estate appraisal related comments on our blogs and YouTube videos. If you need Portland, Oregon area residential real estate appraisal services for any reason, please contact us. We will do everything possible to assist you.