Real Estate and Self-Deception – Appraisals
Somehow we think of appraisals as truth when the reality is they are opinions. Educated opinions and based on data (usually) but they are just opinions.
I don’t have any real horror stories involving appraisals and appraisers and I’m glad about that. It seems most appraisers are professionals and do their job well.
In this current market, I do see some things that surprised me. I had a listing in Doraville on a little, 1956, 3/1 ranch that was listed at $260K. I thought that was pushing it. We got an offer quickly at $290K with a guarantee to pay up to $5000 over the appraisal if it came in less than the contract price. I was surprised when it came in at the contract price because I just didn’t see any comps that an appraiser would normally use (i.e. within 1 mile, size, and conditions) but that is what happened. The appraisal was never shared with me so I didn’t see the comps used but it has made me sign up for a lunch and learn for next week to meet with an appraiser I know and trust to ask about it. This market has surprised many of us with appraisals.
Let’s talk about appraisals in a more general way.
There are different kinds of appraisals and some pitfalls or concerns that exist with them. I’d suggest that good appraisers approach their work the same way regardless of the type of loan or circumstances but I can tell you anecdotally that there appear to be some differences in some of the appraisals I’ve experienced.
- Arm’s length – these get done when there is a transaction that might happen or to value property for legal reasons. The appraiser is hired by one of the interested parties to value the property in question. This happens in divorces, estates, and disputes most of the time. The value should be pretty accurate and done with no real outside influence.
- Refinance – These don’t involve a purchase but instead are done when the owner has a mortgage and wants to get better terms in a new mortgage. A lower interest rate is the usual influence that makes this necessary. Usually, the new lender will order this appraisal via an AMC (appraisal management company) and the appraisers work for the AMC. This is intended to eliminate the lender from being able to unduly influence the appraiser directly to inflate or overstate the value to increase the amount available to be loaned. AMCs are used in any transaction that involves a lender.
- Purchase Money – Did you know that the appraiser has in hand the sales contract when they do an appraisal? They know the target and I think they do all they can to hit it but sometimes they can’t. I am sure there are some appraisers who work the numbers without looking at the contract but at the end of the work, the contract is an influence and I think it applies a little pressure to make it come in at value. No one really wants to be known as a deal killer.
- HELOC or Home Equity Loans – HELOC is a Home Equity Line of Credit. It’s like an Equity Loan but the homeowner decides how much to use and when. They can pay it back and reuse the money at the prevailing rate of the day. HE loans can be variable rates or fixed rates depending on the lender and the market. AMCs are used to hire the appraiser and the lender has limited to no influence on the value but typically the lender will limit the amount of money available to a percentage of the overall loan to value. Max is usually 80-90% but it has been higher in the past.
- Specialty appraisals (lakefront, beachfront, VA, FHA) – I marked this as a specialty because they have some features other appraisals don’t.
- Lakefront / beachfront – These are special because the appraiser has to be familiar with the property, and the area and not let lesser or greater influence happen due to surrounding properties. On Lake Lanier, for example, it’s possible to find a multi-million dollar property next to a single-wide trailer. They might have the same view and the same amenities nearby (docks, ramps, etc) but they are very different. The rules for coming to a value are different and an appraiser unfamiliar with this type of work can sink a deal.
- FHA – These appraisals have the feature of sticking with the property for 6 months. If you got a low appraisal on an FHA application, the value will be seen by future appraisers on future deals for that time period. This can be detrimental for a flipper or rehabber when trying to resell the property. There is also a 91-day wait between sales on an FHA loan so it is sometimes restricted on recently rehabbed property. FHA is also special because they allow for lower down payments than most conventional loans. It can be as low as 3.5% but it includes some fees and costs more than conventional. There might also be some repairs the appraiser will require before allowing the sale to happen.
- VA – These guys get a bad rap sometimes but they have an important job. VA loans are often 100% financing and that means a bit more risk for the buyer and the lender. The default rate for VA loans was well below FHA defaults in the great recession. In 2007, FHA defaults were about 36% at the peak while VA defaults were about 15%. Some argued that ‘skin in the game’ had something to do with default rates but that just does not prove out back then. FHA and VA have similar ‘skin in the game’ but not the same result. I think character and discipline played a bigger role. Today the default rates are almost identical at 2% or so and that’s likely due to stricter lender requirements. Furthermore, the VA appraiser has 2 jobs. The first is to ensure property value but also to make sure it meets Minimum Property Requirements (MPR). That list includes things like working electric, heating, cooling, roofing that will last for a while, size, water, free of lead-based paint, and a lot more. The appraiser might require certain repairs or improvements to be made before allowing the sale to happen. It may seem harder to get a VA appraisal to come in at value but for a modern home, it usually is not a problem.
To wrap up, most loans will require an in-person appraisal unless the loan-to-value is really low. Once you get around 60-50% the requirement might change to a drive-by appraisal or a simple desk appraisal to verify comps and value. As an agent, we are not allowed to exert pressure on the appraiser but we can offer some assistance. If you have an old appraisal that is recent, provide it with a list of comps and features they might not see. The age of major mechanicals, roof, and any improvements made will help them come to a fair and equitable value for your client.
I hope this helps illuminate the types of appraisals and what they are used for.
Thanks for listening,
Jerry