Real Estate Appraisals Are a BIG FAT JOKE - and Everyone Knows It
categories: Alpharetta Real Estate, Buyers
ALPHARETTA - Today’s post may be more of a vent than anything else. Real estate appraisals are a joke. If you agree or already know that, you can stop reading now. Vent released. Otherwise…
It is said that wherever there is bad behavior there is an enabler; for fraudulent real estate investing the enabler is the appraiser. Its no different than Enron’s top accountant, Richard Causey , enabling Ken Lay and Jeffrey Skilling. The guy cooking the books has got to be on board.
The appraisal of your house has nothing, absolutely nothing, to do with its actual market value: what someone will pay to for it in an arm’s length transaction.
How Appraisals Work
Technically a real estate appraisal is the practice of developing an opinion of value for the property. It is done by a professional, licensed appraiser who must follow very specific "guidelines" when comparing properties. In order for fraud to occur, an appraiser usually has to state that a property is worth more than it probably is.
But there is a ton of gray area in appraisals usually around which properties can be used as "comparable sales." Since the market has been declining so quickly recently, guidelines stipulate that a comparable sale cannot be older than 6 months. Well, there are plenty of neighborhoods in Alpharetta where there have not been one, let alone three, sales in the last six months.
When comparable sales in the neighborhood don’t exist, the appraiser is allowed to "go outside the neighborhood" to find comparables. Well, once you go outside the neighborhood it is pretty easy to find a comparable if you want to find one, and there in lies the professional judgment - and ultimately reputation - of the appraiser.
Stuck Between a Rock and a Hard Place
Appraisers are people, though, and therefore subject to opposing interests.
Technically they are working for the lender. They don’t want to bite the hand that feeds them by appraising something too high and then have the loan default and the lender stop sending them business.
They also don’t want to screw up the deal either, because then the mortgage broker - who probably ordered the appraisal and only gets paid if the deal closes - will stop sending them business. It is kind of a "damned if you do and damned if you don’t" situation the appraisers are in.
So here is what happens: The house appraises for $1,000 more than the contracted price. Everyone is happy. Deal goes through. The appraiser protected her butt with the lowest possible "passing value." Problem is that it is no where near a good estimate of value. It is kind of like a "white lie." No one got hurt.
Case in Point
I have clients who just put a house under contract for $301,100. It was a foreclosure that had listed at $349,000 in July. Then it was reduced to $329,000; then to $299,900 a few weeks later.
We paid a tad more than list price because it became a multiple offer situation. The house appraised for $301,500. It is worth more than that, considerably more.
Would it have appraised for $349,500 in July? Give me a break.
Some people would argue that the house is worth exactly $301,100, particularly since there were three separate parties willing to pay basically that same amount - how can I argue that it is worth more?
The answer is that we are trying to get a third party, market-sales-based, value to compare this sale to in order to validate where it is a fair price against which to lend. You can’t compare something to itself to validate that it is itself. Value is relative so there has to be a comparison to something else.
I think that if we really wanted a truer estimate of value, that we wouldn’t tell the appraiser what the contracted price was and just see what they come up with. Now that would be fun. Why give them the answer before they take the test? Because people in the real estate industry stand to make money based on whether the transaction closes, that’s why.
Don’t Sweat it, Buyers
Buyers tend to wig out a little when the appraisal comes back, so what I tell them is that it is meaningless and I tell them in advance that it is going to come in at $1000 more than the purchase price and to not get worked up about it. That is just the way the system works.
But now, since we all know that it is a "system" and not a legitimate estimate of value, can everyone please stop advertising that their property appraised last year for some ungodly amount more than you are asking for it today, so therefore it is a bargain today. Appraisals are a BIG FAT JOKE - and everyone knows it, including your prospective buyers.
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It is amazing, and not unique to your market. They should be called “form-fillers” rather than appraisers. Its a misrepresentation of their role in the lending process. However, your generalization is a product of frustration I suspect. Its like saying realtors are a big fat joke, isn’t it? Many are not.
Keep up the good work - you’ve got a great blog.
Jonathan, you’re spot on, but i’d say it is more amazement that frustration, although i did have an appraiser cost us a $1.6M deal last year. His appraisal came in $80k below contract price. After our deal fell apart, two months later the seller got another contract at $1.6M…it appraised just fine by a second appraiser. That sort of thing will drive you bug nuts.
And to your point that it is similar to saying realtors are a big fat joke…i dare say, many are. I struggle with the perception of realtors every day. My goal is to change that perception/reality for my little part of the world ;->
Thanks for reading and commenting. I love hearing from readers…it keeps me writing.
I’m totally with what you’re saying here Kevin, but I like to play devil’s advocate….
Isn’t a property only worth what someone is willing to pay for it? Would your Buyer’s be willing to pay more if the appraisal comes in $10,000 higher? (after all it’s worth it, right?)
In my opinion, appraisals are pointless after an agreement has been reached. Appraisers are suppose to make their best guess at what market value is for a property and we just determined that by marketing the property to an open market and negotiating a deal with a ready, willing and able buyer. At this point, the appraiser just has to justify the price to the lender to secure the mortgage.
I think appraisals are best used for situations when a market sales is not involved; like valuating property for a divorce, estate, or refinance.
Wow..An appraiser cost you a $1.6M deal over 80k? Maybe the seller should have lowered the price or maybe the buyer could have come out of pocket more. Or maybe you could have reduced your commission? Or maybe you could have hired a competent appraisers to begin with? Or maybe…
Kevin,
So whats your point? Markets always change, ie Gold, oil and wheat futures.
Real estate always had a slow fluxtuation. A very slow ebb and flow. In our life time real estate never crashed. Well, we just experienced the beginning.
I am a real estate appraiser in Cleveland, Ohio.
Perhaps you never saw it coming. This tells me your out of touch with your profession.
Let me give you a heads up. In the last 2 months I have witnessed 10 to 12 people living in grandmas bungalow. People in the inner city are burning radial tires just to harvest the steel.
New trends always started in California. I believe this time the the real estate trend started in Cleveland and Detroit.
Save your money.
From, a 30 year experienced real estate appraiser in Cleveland, Ohio
The point is that real estate appraisals don’t give you a accurate value of the property; they give you a cover your butt answer so that no one gets in trouble.
This has nothing to do with the current state of the market - other than that the current state of the market has make appraisers even more cautious.
Hey Kevin I live hear in north Cumming,GA and could not agree with you more…. Appraisers for the most part are clueless. There are a few good ones but they are far and few between!
What about property appraisals from taxing entities? My North Fulton “name brand” townhouse was built in 2005. Fulton County has changed the assessed value on my home every single year. This year, they jacked the value up 50K based on “comps.” The problem is that there aren’t really any comps for my townhouse. It’s a 2 bd, 2.5ba, but it’s being compared to 3 bd, 3 ba units (and larger).
The Fulton County assessor told me that they don’t take number of bedrooms into account. I agree that the difference between a 3 bedroom and a 4 bedroom isn’t that much. But when you go from a 3 bedroom to a 2 bedroom, you eliminate families from the buyer pool. You’re left with singles, married-no kids, and married with 1 young baby.
Tell me THAT’S not a racket.