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I recently found that two people in my subdivision sold their houses and then when very low appraisals came in the deals fell through. This does seem to circumvent the open market for establishing value but I forgot about it until I tried to refinance recently.
The appraisal on my property dropped from $465K to $425K from 2006 to 2010 which did not surprise me and seemed to track the local market as a whole. Then I received an appraisal this month of $345K which is even lower than a Zillow estimate. This made no sense to me and I see the 'comparables' are not really equal and one thing that really bothered me is I identified one 'comparable' is not a sale or even asking price but the low-ball appraisal that killed one of the sales.
What kind of checks and balances are in this new 'hands off' appraisal environment. When I asked the mortgage broker he said he had no recourse and that 100% of refi's in the past year came in lower than the owner estimated and most in an up-side down condition. The local real estate professional told me it appeared to him to be a real effort to lower values so he got out of sales and now makes a living with rentals (more than one home in the subdivision went from sale to lease because of this).
I will manage my transaction by putting up more money and will try not to worry as I don't expect to sell soon but the system does seem to be out of control.
1. Zestimates are not worth the electrons used to display them. Ignore Zillow's "estimates".
2. Appraisals always lag the market. Because appraisals are based upon sales (in theory), they will always be behind the market. Lower if it is moving up and vice versa. Not a problem when the market is moving slowly, but a huge problem in a rapidly changing market.
3. Appraisers are hired in the weirdest manner possible. The lender contacts a 3rd-party who selects an appraiser at random from the pool. There is no longer any incentive to do a good job. Many appraisers have no knowledge of the locale in which they are doing the appraisal. This was all done to prevent collusion between realtors and banks. Remember the Housing Bubble?
4. Appraisers are under pressure to come in low. It is a reaction to the Bubble.
5. You can have some (little) influence on the appraisal.
a. Find your own comps. Sold in last 6 months. Nearby. Similar in size, etc.
b. Meet the appraiser and politely hand him (most are male) your list.
c. Go to Mass every day.
One of my biggest complaints about appraisals is that they are being used to determine sales prices. That should not be the case.
Although I understand the need to thwart fraudulent transactions, we are using appraisals in an inappropriate manner. An appraisal is still just one person's opinion of value, albeit hopefully an educated one. The problem is that a particular property can yield widely different appraised values from different appraisers. The more unique the property, the greater the potential for varied opinions.
In the course of my work I deal with a lot of government transactions where policies dictate that purchase prices are to be based on appraisals (no negotiating). A recent purchase was of a property which had been listed for sale for over 6 months. However, an appraisal was done which opined that the market value of the property was 36% GREATER than the listing price--even though no offers at the listing price had ever been made.
The result? The property was purchased at the appraised value, which now becomes a comparable sales price for other appraisals. This faulty appraisal will now artificially inflate the price of other properties, since very few properties of this sort are being sold in the area. Solely using an appraisal to establish a sales price is just crazy.
Last edited by jackmichigan; 01-19-2013 at 09:08 PM..
One of my biggest complaints about appraisals is that they are being used to determine sales prices. That should not be the case.
Although I understand the need to thwart fraudulent transactions, we are using appraisals in an inappropriate manner. An appraisal is still just one person's opinion of value, albeit hopefully an educated one. The problem is that a particular property can yield widely different appraised values from different appraisers. The more unique the property, the greater the potential for varied opinions.
In the course of my work I deal with a lot of government transactions where policies dictate that purchase prices are to be based on appraisals (no negotiating). A recent purchase was of a property which had been listed for sale for over 6 months. However, an appraisal was done which opined that the market value of the property was 36% GREATER than the listing price--even though no offers at the listing price had ever been made.
The result? The property was purchased at the appraised value, which now becomes a comparable sales price for other appraisals. This faulty appraisal will now artificially inflate the price of other properties, since very few properties of this sort are being sold in the area. Solely using an appraisal to establish a sales price is just crazy.
Which government agency is buying properties based on appraisals that are 36% greater than listing price?
I'd like to invest in that area!
Which government agency is buying properties based on appraisals that are 36% greater than listing price? I'd like to invest in that area!
Actually, I've thought of doing that myself.
I think the whole problem surrounding appraisals is that banks, government agencies, and others tend to sanctify appraisals to such a degree that they truly believe that appraisals indicate "the" market value. It's a lack of understanding of what appraisals truly are--and a lack of common sense--that underlies the problem.
One of my biggest complaints about appraisals is that they are being used to determine sales prices. That should not be the case.
...
Agreed. I was able to speak with a local real estate expert about this last night and he agrees that the distortions in the local market are larger than ever, and suspects it is a nationwide issue. An appraisal is nothing more than an opinion often rushed and without full information.
Noted that mortgage companies, other financial institutions, government appraisers, and professional appraisal staff each apply different priorities, goals, methodology, with inconsistent results. Without independent audits the market is subjected to a wide range in valuations that are often not good for the community. Changes that were instituted as result of past abuses have created a new set of abuses.
He stated that the valuation he trusts most is a cash transaction where buyer and seller agreed to a transaction without pressure from third parties.
1. There is no longer any incentive to do a good job.
Sure there is. It is called risking to lose your license if you don't
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2. Many appraisers have no knowledge of the locale in which they are doing the appraisal.
Actually, an appraiser MUST have geographical competence. Otherwise they run the risk of losing their license.
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3. Appraisers are under pressure to come in low. It is a reaction to the Bubble.
Actually, appraisers cannot be influenced either way. Coming in under value is just as bad (read: illegal) as coming in over value. Otherwise we run the risk of losing our license.
Incidentally, real estate is not a commodity and the "bubble" did not affect the whole country.
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4. . Find your own comps. Sold in last 6 months. Nearby. Similar in size, etc.
Unless you have the education and experience to determine whether or not they are actually comparable, they are sales. I have homeowners and even realtors hand me lists with "comps". Of course, I have the same MLS and other data bases as they do, but I take them and thank them. They rarely, however, are comparable.
One of my biggest complaints about appraisals is that they are being used to determine sales prices. That should not be the case.
Although I understand the need to thwart fraudulent transactions, we are using appraisals in an inappropriate manner. An appraisal is still just one person's opinion of value, albeit hopefully an educated one. The problem is that a particular property can yield widely different appraised values from different appraisers. The more unique the property, the greater the potential for varied opinions.
In the course of my work I deal with a lot of government transactions where policies dictate that purchase prices are to be based on appraisals (no negotiating). A recent purchase was of a property which had been listed for sale for over 6 months. However, an appraisal was done which opined that the market value of the property was 36% GREATER than the listing price--even though no offers at the listing price had ever been made.
The result? The property was purchased at the appraised value, which now becomes a comparable sales price for other appraisals. This faulty appraisal will now artificially inflate the price of other properties, since very few properties of this sort are being sold in the area. Solely using an appraisal to establish a sales price is just crazy.
Who and what determined the appraisal to be faulty?
I frequently appraise a property for a higher value than the list price. All that means is that the seller/realtor didn't know how to price the property or that it is a distress sale. In that case, it is a non-arms length transaction and that sale will not be used as a Comparable in a regular transaction.
I frequently appraise a property for a higher value than the list price. All that means is that the seller/realtor didn't know how to price the property
Of course it doesn't necessarily mean that. It simply means they determined a different value than you did.
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