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OK, so I've seen lots of great advice on this site. Figured I'd try to pick your collective brains.
My wife and I are in the process of buying a new home. We found a perfect place, did our own research on selling prices in the neighborhood, and eventually got a fair offer accepted by the sellers. Here's where things get sideways:
The appraisal on the new home just came in. Our sale price is $377k. The appraisal came in at...wait for it...$285k. Now, I've bought and sold a few homes in my time, and I know that low appraisals sometimes happen. But this is unlike anything I've ever heard of. Apparently the appraisal company thought so too, as we didn't even have to ask for a field review. They simply tore up the original appraisal and ordered a new one. They said something about the appraiser was new to the area and shouldn't have been assigned this case in the first place. Ya think?!!!
We provided the appraisal company more accurate comps that the original guy somehow overlooked (one was literally around the corner, about 400 feet away, from our new home, and sold for more than our sales prices. Same size, actually not as nice inside, obviously same neighborhood, sold less than six months ago, etc...). Hopefully that will help the process.
Anywho, my wife and I are now awaiting the results of the second appraisal and have agreed to not go above the appraised price, whatever it ends up being. The situation is somewhat complicated by the fact that we have a cash buyer for our current home who is waiting on this appraisal just as we are. Hopefully this second appraisal will come in fine and that will be the end of it.
I'm just curious if anyone has ever heard of an appraisal coming in THAT far away from the agreed sales price? Both our realtor and the seller's realtor can't think of another instance where the discrepancy between appraisal and sales price was so large. It's almost comical.
Maybe the appraiser knows what he is talking about and saved you some money.
Here is the dirty little secret. 90% of the mortgage appraisals are ordered through AMCs (Appraisal Management Companies), most of which are financially connected and owned by the banks. The ordering is based primarily on the lowest fee the appraiser will accept, not on knowledge of the market, experience, etc. how do I know? Because I am a retired appraiser. Retired because of this system. Transitioning into sales now.
You get an appraiser from out of market, no knowledge of the market, who is paid to churn the report out the fastest way possible, and a bad appraisal is the result.
You can thank federal regulations for this process. So when you pay $500-600 for that appraisal, remember that the appraiser may be getting as little as $150.
Here is the dirty little secret. 90% of the mortgage appraisals are ordered through AMCs (Appraisal Management Companies), most of which are financially connected and owned by the banks. The ordering is based primarily on the lowest fee the appraiser will accept, not on knowledge of the market, experience, etc. how do I know? Because I am a retired appraiser. Retired because of this system. Transitioning into sales now.
You get an appraiser from out of market, no knowledge of the market, who is paid to churn the report out the fastest way possible, and a bad appraisal is the result.
You can thank federal regulations for this process. So when you pay $500-600 for that appraisal, remember that the appraiser may be getting as little as $150.
I agree with this, except that being from outside the market doesn't necessarily mean not having knowledge of said market, just like living around the corner not guaranteeing the ability to write a credible and well supported report.
The fee issue is a valid one. As an appraiser specializing in rural and other complex properties, I cannot phantom accepting an assignment for less than Customary and Reasonable fees. I can stay home and not making any money.
The biggest problem I have with these situations is that it is a USPAP violation accepting an assignment the appraiser is not competent to do, be it the type of assignment or location, without first informing the Client about that and explaining in the report what has been done to make oneself competent. IF the Client agrees to go ahead.
Last year I saw two appraisals that were incompetent and redone without question One had so many mistakes (inconsistent adjustments, photos of the wrong house, etc) and the other appeared to be completed by two different appraisers. Not sure if this was because they used another appraisal and forgot to remove remarks regarding the other property or a second person did come in to finish what someone else started.
I also wasn't sure how it made it thru the AMC review (why I believe their review doesn't consider the "whole" report and they only look for key items), but once I insisted a review appraiser (employed by the AMC) give it a look over (not a formal appraisal review - an order for additional work product), both reports were eventually sent to a new appraiser for completion. Neither made it beyond the processor's review and into the file.
There are some good AMCs out there that are not bank owned or offer an automated rotation ordering system (the bank puts in the appraisers they wish to use). The appraiser is required to put in the appraisal how much their compensation was for the report. Also with the report should be the invoice to the lender or bank. Simple math will tell you the AMC 's earnings. My experience (in the DC market) the appraiser is making $350 to $375 per report and the AMC is making $125 on top). If it's determined the appraisal to be complex and warrants more money, 100% of the increase goes to the appraiser.
As for the OP's experience, It sounds like incompetence was recognized early and most likely anyone (in the field) could point out why. (There would have to be so many errors to not return it back to the original appraiser for correction, which is the typical process). Unfortunately, for one of my two orders, it appeared the AMC knew they had an issue and was using my order to document they had a problem. And when you consider I had just over 100 solid appraisals, 2% "rejection rate" is actually an improvement in quality over the prior year.
Just to update: the sale price was $377k. The first screwed up appraisal was $285k. The second appraisal just came in yesterday at $362k. That's right around where we felt the house should have been priced anyway. We've told the sellers that we'll pay that price. If not, we're fine with walking away. The seller starts his new job five states away tomorrow, and they've had no other offers since listing six weeks ago. Looks like they have a tough decision to make.
Just to update: the sale price was $377k. The first screwed up appraisal was $285k. The second appraisal just came in yesterday at $362k. That's right around where we felt the house should have been priced anyway. We've told the sellers that we'll pay that price. If not, we're fine with walking away. The seller starts his new job five states away tomorrow, and they've had no other offers since listing six weeks ago. Looks like they have a tough decision to make.
Sellers came back with an utterly ridiculous post-appraisal counter offer of $375k, meaning we'd need to come up with an additional $13k in cash at closing. Obviously, we're saying no and walking away. They apparently didn't put much down when they purchased and are now stuck needing to get more than their home is worth just to get out. It's unfortunate, because we really love the house, but we'd be fools to overpay for it to cover their bad decisions.
It's rather interesting that the history of this house apparently shows increasing values through the financial crisis that we had. Was it rehabbed somewhere during that period of time?
It's also interesting in that the sellers don't have any equity despite your claim that the market has been increasing at these high rates. So where is the equity that they should have as a result of these increasing values? Something isn't making sense with these numbers.
The house was sold for $225k in 2006, then fully renovated and sold for $325k in 2007. Those owners also added a few things (new HVAC components, new roof, various fixtures, etc...), then in 2011, it sold to the current buyers for $360k.
The current owners have admitted that they have done nothing to the house since purchasing two years ago. Their original asking price in early December was $390k, meaning they felt they would get nearly a 10% increase in value over two years. The area the home is in has always been a very desirable neighborhood, and it's becoming even more so as more homes are rehabbed, but it's not so desirable that it would justify that kind of increase in value so quickly. And that fact is plainly evident as the house has been sitting for two months with only one offer (ours).
The sellers agent is now claiming they already have a second offer, but we have no idea what the offer is. We're also pretty confident the new buyers will have the same appraisal issues we had. It's just sad, as we really wanted the house, but there's no way it's worth overpaying by $15k for.
Quote:
Originally Posted by yousah
It's rather interesting that the history of this house apparently shows increasing values through the financial crisis that we had. Was it rehabbed somewhere during that period of time?
It's also interesting in that the sellers don't have any equity despite your claim that the market has been increasing at these high rates. So where is the equity that they should have as a result of these increasing values? Something isn't making sense with these numbers.
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