The Appraisal Conundrum

Although the news is full of stories about increased home sales and huge demand (despite the volatility of rates recently), with all this activity appraisals remain a problem for buyers, sellers, lenders and everyone involved.

A buyer makes a competitive bid–one of 20 offers on the property–and it is accepted by the seller at $100,000 over the original asking price.

Now we have to sell that same property all over again, but this time we have to sell the property to the lender. A mortgage application is made and an appraisal is ordered. As required the appraiser is given a copy of the purchase agreement as part of the appraisal order so that they know the agreed upon purchase price.

The appraisers’ job is to go out to inspect the property and then compare the subject property to other similar properties (same age, condition and style) that have sold in the same price range, same general neighborhood (within three miles) and same time frame (within the past three months). The appraiser then reviews the comparable properties and puts them side by side on a grid for comparison and through some formulas derives a market value as supported by the comparable sales.

The appraisal is sent with the full loan package into underwriting.

Underwriters are trained to review and document and review again; they utilize some valuation tools, computer models that will show sales in the timeframe and price range and offer an automated valuation. If the computer model disagrees with the actual appraisal report the underwriter could request a review appraisal.

Here’s where the fun begins. This means that another appraiser goes to the subject property and provides a second appraisal.

Unlike most of the country where there can be mile after mile of similar homes in terms of age, style and room count (in fact there can be hundreds of almost identical homes in one sub-division), in the North East we have a huge variety of home styles on every block. It is a challenge with today’s appraisal rules to find enough similar property sales to support the appraisal.

Another frustration is that there is no standardization in the appraisal process. One appraiser can value a fireplace at $8,000 and another at $15,000 or a parking space at $35,000 and another at $100,000. Recently, a tandem parking space sold in Back Bay (Boston) for $560,000! There is no effective way to determine if one appraiser is right and the other is wrong; the industry simply says that they are using the appraisal that came in with the lowest value.

Until there is some consistency in the way appraisers approach a property and value the components utilized for comparison, an appraisal will always be an ‘opinion’ of sorts and will please some and frustrate others on our journey to real estate recovery.