Are 39% of Appraisals wrong??

Question

The Real Estate Economy Watch published a newsletter this morning and this article caught my attention (as all good headlines will!).

Are 39% of Appraisals Wrong?

I read the article though and it talks about a few things that I want some clarification on.  Would love for someone in the appraisal or mortgage industry to explain in a little more detail than the article does exactly what a statement like this means:

"A study by a company that analyzes appraisals to reduce lender risk found that 39 percent of more than 300,000 appraisals contained property quality or condition ratings that conflicted with previous ratings of the same property."

They say that these conflicts cause delays, cost over-runs for buyers and lenders alike, but it never says what those conflicts really are.  Anyone want to chime in and explain what is going on here and what the real ramifications are?

Account Closed · Answer

Only 39% of appraisals are wrong? I hate to rip on the appraisal industry, but it's one of the biggest scams out there IMO. Appraisal tends to come in at the contract price....magically. Really? However, like many other industries, there are some really good appraisers out there. I guess we have to accept the good with the bad.  :>)

Clint Dorris · Answer

The condition and quality rating thing is a relatively new appraisal requirement. UAD appraisals require a condition rating of C1-C6 (new to terrible) and a quality rating of Q1-Q6 (Beverly Hills to Backwoods shack). The indecision comes over what is a C3 and what is a C4. There are specific definitions for each, but it is a judgement call. Has the entire house been updated, or just half of it? Over the last year, lenders have access to this data and can compare what appraisers are rating the properties. A lender might come to me and say, you called this a C4, but other appraisers call it a C3. The problem is, appraisers don't have access to this data, so I have no idea why another appraiser called it C3.

My guess is that the differences in this article have to do with the above. It doesn't necessarily mean that the values are wrong, but the ratings differ.

As far as values go, the definition of an appraisal is an OPINION  of value. So, yes they can differ between appraisers. They can also differ between buyers. What I see on this site is investors wanting a value that gets them a loan. There are good and bad appraisers and investors. And, investors can know value better than an appraiser, particularly in their niche. But, if it is a good appraiser, and the numbers don't match yours, you might want to consider it a warning sign. While there are bad appraisers, most of them are professionals who look at these numbers and comps every day.

Finally, on to the issue of appraisals coming in at contract. The rough definition of market value is a motivated buyer and seller under no outside influence. Do we look at the contract? Yes. We likely are influenced by it. But also, most houses sell for market value. Ask a realtor. It's hard to sell a house too high. And, if it is low, there will likely be competition. A motivated buyer and seller usually wind up at true market value (not an appraisers opinion). If not, the buyer moves on to the next house. This is called the principle of substitution. It's why we use comps.

Russell Brazil · Answer

I am not an appraiser, or a lender....but I actually ran into this very issue recently. I purchased a property recently that had just had another contract fall through on it.  So this property in a very short time frame did for through the underwriting process twice, including two appraisals in a very short period of time. I was able to get the old appraisal to compare the two. I did this mostly out of curiosity..I also got the previous home inspection report to compare.

Though the two appraisals were very similar in price...the first was appraised at $420,000 (The contract price was coincidentally $420,000) and the second appraisal when I purchased was $415,000 (Shockingly my contract price was $415,000) the way that they arrived at the prices was interesting.  I did not there were different descriptions on the condition of the home, different descriptions on the quality of the renovation in the kitchen and bathrooms.

So I am sure as these two appraisals made their way back into the Fannie Mae system, the different descriptions of the property were noted.

Really the same thing happens when you have two agents pricing a home as well. We will have two prices that are probably pretty similar, but we may have two different reasons why we arrive at that price.

The thing I think in the appraisal process currently, at least in my market...is almost every single appraisal I have seen in the last year, maybe 18 months is the same exact, or incredibly close (Usually same exact) to the contract price.  I almost think that the appraisers are taking the contract price and working backwards to create an appraisal that will work for the underwriters.

Elizabeth Grahsl · Answer

I'm a lender, and we deal with appraisal issues all the time.  It sounds like what you are asking about, and what the article refers to, are variations from appraisal to appraisal on things like square footage, number of rooms, general location or condition (both of the latter items can be adjusted for positively or negatively in relation to the neighborhood).  This is more of an issue on older homes and/or high end homes, but appraisals are more art than science, which we have to constantly explain to our clients.  You'd be surprised at the variation you can see on characteristics of a property that seem like they should be straightforward or objective.

Many times an appraisal will cite different square footage than the tax district or a previous appraisal, for example.  Some appraisers view closets, stairways, storage areas, enclosed patios, and other spaces differently, which can make a big difference in a large house.  The definition of "unfinished" can be disputed as well, and measurements can just be off.

Another factor is that lots of money put into things like custom landscaping, exotic fixtures, outdoor living spaces and even flooring materials might add zero value to an appraisal even if such items would entice a knowledgeable buyer to pay top dollar.  There is often no specific box to check on the appraisal forms to adjust for that stuff.  A property is either landscaped or not.  The deck is either improved or not.  Appraisers can't tell unless they've been in lots of comps themselves whether an "improved deck" in that area generally means an outdoor kitchen, pergola and fire pit with high end appliances or a $500 grill and an aluminum sink in the corner of a bare deck.  So one may not give you any additional appraisal value even though it would obviously be more marketable.

HOWEVER a knowledgably appraiser who is familiar with your area may know that such things are common and expected - or not - so they might adjust the comps differently.  Or they may know that one street or park is considered superior by locals and adjust accordingly.  The problem with the third party anonymous appraisal ordering that is now mandatory is that too often appraisers are from 45 miles away and have no idea of such things.  So they can only go off the boxes checked in the system.

Lane Kawaoka · Answer

Appraisers will tell you that the reason that their appraisal magically comes in near the sales price is that the sales price is the point where the seller and buyer have met at a mutual acceptance of price.

....Yes in a perfect word. I think appraisers are in a way a public entity like USPS that has become a bastardized industry post 2008. Appraiser work is awarded on a queue system where you don't know if your getting someone who is good or someone who already had a few beers and is wearing shorts to the appraiser appointment. I am exaggerating this a bit but there is no check and balances other than a so called certification.

Mike Nuss · Answer

@Chris Clothier your pull quote is exactly how a good reporter incites the audience.

"A study by a company that analyzes appraisals to reduce lender risk found that 39 percent of more than 300,000 appraisals contained property quality or condition ratings that conflicted with previous ratings of the same property."

The system is flawed for these types of inconsistencies throughout the appraisal industry and even down to the individual appraiser himself.

Appraisers use a system called UAD (uniform appraisal dataset). It's one of the great "benefits" of Dodd Frank. This is a 1-6 rating system for quality and condition. A C1 for condition would be new construction. A C6 is a tear down. A Q1 for quality is the top quality custom built residences. A Q6 is like a cabin in the woods. The problem is each increment has about a paragraph of explanation with a lot of room for subjectivity. A 4 in one appraiser's mind may be a 5 in another.

I had a conversation with an appraiser friend of mine who does a lot of volume. He's been talked to by the state recently because his comparable were rated as a 4 or 5 in one report and then that same comp is rated as a 5 or 4 in a separate report.

There's too much subjectivity in "rating" the condition or quality of a home and that gets even more "gray" when factoring in the fact that comps are being "compared" to the subject.

So if your subject is a 4/5, but closer to a 4 and you use comps that are all 4/5 and call them all 4 because the subject was called a 4. Then in a separate report down the road the subject is a 4/5, but called a 5 because it leans closer to a 5. Then you use some of those same comps that are 4/5, but call the same comp as a 5 when comparing it to subject #2, even though you called it a 4 when comparing to subject #1.....it now becomes a huge red flag in these measuring systems that lenders are using. In reality it's a comp that is better than a 5, but worse than a 4, just like the subject was in both cases. However, the final call on the subject gave influence to the final call on the comp. It may look and feel good in appraisal #1 in a vacuum. It may look and feel good in appraisal #2 in a vacuum. But when you put those two appraisals together glitches start to happen.

In reality we all know properties can have aspects of a 4 and of a 5, but at the end of the day you have to call it a 4 or a 5. Well, real estate doesn't work how computers say it should work and how automated value machines need it to work.

I hope this makes sense. Under standing the disconnect between appraisers, realtors and the reality of the market place gets me all riled up sometimes.

Jay Hinrichs · Answer

@Chris Clothier  Like all things I think a lot of this is regional..  in the last 4 years I have only had one appraisal that did not come it at sale price in Portland.. much like most west coast folks appraiser will generally come in at contract price..  Even when there are bidding wars and a home sells for 100k more than listed price...

Were we have a lot of appraisal issues is in Texas and mid west... As generally homes are sold a lot of time for more than the appraisal then its a real fight.. its like the appraiser do not factor in moving markets..

I know I have seen on BP some feedback on Turn key deals were buyers were in contract for one price and appraisal comes in shy..

I really don't know why that is... but I do know that most of my mid west properties that I have owned over the years have Never actually sold for a refi or ARV appraisal value when you actually put it on MLS... it takes a out side marketing agent to usually get the bigger dollars and or buyer comes up with a little more cash.. this was a very rude awakening to me when I first entered the mid west market in 2002.. I just could not figure out how I could buy a home that appraised when I bought it for 130k on an ARV appraisal then go to sell it and I can never get an offer over 110k  LOL... at least on MLS...

Were in other markets our properties sell for 100% of appraisal routinely and 98% of list always.  Unless its a dog of course.

Chris Clothier · Answer

Hey Minh!  Thanks for your comments.  I was hoping to get an appraiser to explain to us what is getting kicked out and why 39% would be questioned.  Surely it cant just can't be that the appraisal is at contract price, but we'll see.  I agree with you too...like every industry there is good and bad, or hard working and lazy.

All the best to you this next year - I love reading about all your success in northern cal when you post and comment on BP!

Mike D'Arrigo · Answer

Appraisals often come in right at the contract price. That's because a big part of a properties value is what a willing and able buyer is willing to pay. If the comps support that price, that's what the appraiser will determine the value to be. They'll generally be conservative and not appraise it above the sales price.

Are 39% of Appraisals wrong??

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