WELL I HAVE AN APPRAISAL FOR $480,000!!
SO WHAT!!
So you are buying a home. Let me give you just a couple of recent scenarios in which I have been involved. Lets start with the theory that the Appraiser is an additional fail safe against my Realtor being wrong or incompetent. Recently I represented the buyer of a home which I had appraised 3 years earlier. In fact I was contacted by the Seller because his agent, from a respected large real estate firm told him he needed to get an appraisal of the home because he could not value it himself!! Wow....seriously....what an admission to actually make if you are a sales man!! Most salespeople are never short of an opinion that they try to sell a person on. How refreshing. I am sure he is no longer a sales man. So I went over and did the appraisal. The home was a essentially a ranch home sitting on acreage in a metes and bounds setting ( i.e. it was not in a platted subdivision) and the Seller had converted a 4 car garage into 3 bedrooms and full bathroom. Then he proceeded to build on another 4 car garage to replace his converted garage. From an exterior elevation standpoint there was nothing wrong. It all flowed. Take away the converted 4 car garage and it was essentially an executive style ranch home with 3 bedrooms and 2 baths, an original to the structure finished basement, and a 4 car garage sitting on 3 acres.
The square footage of the converted garage amounted to just over a 1000 sq.ft. of added finished space. The problem was that the space added no value to the home or constructively none. First of all there is not a tremendous demand for 6 bedroom homes these days. Secondly, the additional converted garage, now bedrooms required one to walk down to them though an exit off of a family room and were actually separate from the original basement. Not that basement bedrooms would have done that much more to enhance value or marketability. So the rest of the above grade finished space was normal and amounted to about 2250 sq.ft. As an appraiser I gave what I knew as a Realtor what the market would command, that is, full value to the "normal" square footage. Then I gave the value of $5/sq.ft. to the dysfunctional asymmetrical square footage that was the separate lower level 3 bedrooms and a bath area. Contact Me
My market documented derived range of value 3 years ago, which was well into the harmonic conversion, otherwise known as the debt crises, was $400,000 to $420,000 with the caveat that it could possibly be a little lower. The seller had been recently divorced. Without telling me I am fairly certain that he settled the marital division of assets based on a price somewhere around the $600,000 range. If I had to guess he probably agreed to that value because he fancied himself as being pretty knowledgable about real estate.
Shockingly, he did not like what I had to say and discounted a rigorous and exhaustive appraisal of his home. Of course I attempted to secure his listing, but in the sales world no one likes the truth. It is very much akin to politics with the insuing results. Flash forward to 3 years later. Mr. Seller has spent most of that time on the market with different agents marching down from an original asking price of about $600,000 in $25,000 increments. As it turns out I actually had a client ( note I said client, not customer...there is a difference!!) who actually fit the profile of one of the potential profiles likely to purchase the home. Specifically that would be a single divorced man with visiting children who wanted privacy and probably ran a business out of his home. Now that is a pretty narrow niche for a sub market, but nonetheless it was in fact a description of a potential buyer. Contact Me
So we come along and Mr. Seller is 60 days into his current listing at an asking price of $420,000. We finally strike a deal at $398,000. That is a fair deal to me. I of course went back through and analyzed the market again since 3 years had passed and our agreed to sales price was within my current analyzed documented concluded value range. So what is the big deal to the Seller? Well immediately after my original appraisal 3 years ago, he purchased a piece of land upon which to build for close to $200,000. It required a mortgage since his cash was tied up in his current residence. So take 3 years of paying on a mortgage, plus property taxes and hey that starts to add up. At least $6000 in property taxes and probably close to $30,000 in mortgage payments. OUCH. Plus he was not spring chicken and he lost 3 years of his life in terms of getting to where he wanted to be. But that is not the end of the story. Contact Me
What do you think the appraisal for my client came in at? First lets review the gross facts. It was in the computerized listing database that we and all appraisers use for $420,000. When we came along it had been on the market during the very very hot spring market. When we struck our deal we were getting on the very tail end of the spring market time. It had been on for 60 days so this was not a situation where it came on the market and got an offer in the first 2 days. It had decent market exposure in an area of very high effective demand. Additionally, with the push of a mouse button all realtors and appraisers can very quickly see that it has been for sale for 3 years. Keep in mind that while the home is not in the main stream of the majority of homes in its competitive marketing area, it's submarket of homes on non platted ( metes and bounds) land parcels of acreage is a definite sub market in which there are many many homes similarly situated. While its description does not match the majority of homes in its competitive market, it makes up at least 10% of the types of propertys in its immediate marketing area. In other words there was a viable market for the product. Certainly other comparable homes with acreage that made for good comparable sales to this property sold through out the 3 years this Seller spent marching down to fair market value. Remember the principle of substitution is alive and well in the very efficient real estate market. That is to say that anytime you are on the market you are competing against other homes and consumers will see your competition and if you are grossly out line with your competition for no discernible reason....you sell their home.
So what did the appraisal come in at.....$480,000!!! Appraisal What are you kidding me? Really?!!! My client's mortgage broker called me excitedly to tell me what a great job I had done for my client. Now a lot of folks in this business would have called their buyer to brag and tell them how great of a job they had done for them. I took the opportunity to explain to this mortgage broker and eventually my client that it did not pass the straight face test that in an area of high effective demand ( this property is located in an income level where the average income is in the upper 1% of the State of Indiana) that my client just made $82,000 by purchasing this home. I knew immediately what had happened and how the appraiser got there.
There were several reasons. First the appraiser had given the same value of the converted square footage of the garage as she did to the "normal" functional original square foortage. Appraisal. That is a thousand square feet at $80 per square foot or $80,000. Subtract that out and you get right to an appraised value of $400,000 or what true fair market value. Now you have to ask yourself whether this gets through the checks and balances that are in place for the appraiser, who represents the lender, not the buyer! I of course inquired and was told that in deed the appraisal being so high above the contract purchase price had invoked the underwriter to have the appraisal reviewed. And thusly it was. And it passed...AGAIN. You have to ask yourself how two purported professionals could sign off on something that is 20% higher than what a very efficient market yielded...but they did. Plus the range of value was from $480,000 to $560,000. So the appraisers were saying it could be worth as much as $560,000. A 20% range of value. Really...my dog could have done better. Because of how I comport myself with my clients my buyer understands he did not get a deal. He knows exactly why it was wrong. This is why the only appraisals I trust are my own.
Some of the other reasons that the appraisal were wrong were because of rigid Fannie Mae guidelines invoked after the debt crisis which put limitations on appraisers. The new standards frequently require an appraiser to use purported comparable sales that meet the recency, proximity, and net adjustment requirements of Fannie Mae. In too many cases this results in analyzing sales that are not truly comparable to the property. Then, having reviewed the appraisal in detail, there is simply the fact that the appraiser has not a clue about this particular sub market in this area. Appraisers frequently have no understanding of the fact that how a home is laid out can make dramatic differences in value in both directions...positive and negative.
Whether I am representing the buyer or the seller, I do a full blown appraisal type analysis so that I can truly discern what value is and what is driving value and marketability in a market. Then I look to see how the particular home fits within its market and what the particular home's defining marketing factors are. Then it is the those market and home factors that I use to sell the home. When I represent the seller, I meet the appraiser at the home. While this story involves an inflated inaccurate appraised va;ie, I have seen many a time when the appraiser fails to find the value that I did and that I was able to secure from the market. So you also have to make sure that an incompetent appraiser does not kill your deal. To see how an appraiser can kill a sale see Appraisals High. For an example of that see war story declining market. To avoid a similar situation as the foregoing Contact Me.