Appraiser's Absolute value vs. Price per square foot?

Question

Dear BP family,

From your personal experience (or profound knowledge even better:)- when assessing/appraising the property, the appraisers do it based on :

1) Average Absolute value of similar-size houses in the 0.3 miles radius?

OR

2) Average Price per sq. foot of similar size houses in the 0.3 miles radius (multiplied then by the actual square footage of the assessed property ?

Of course- assuming all the rest futures are the same (HVAC/rehab standard, garage, etc)

Patrick Britton · Answer

Appraisers are never supposed to simply average out the comps.  You find evidence that they've averaged out the comps and you have yourself quite the legal case against that person.

However, there are no requirements that any of the comps need to be within a 0.3 mile radius.  Unfortunately, appraisers are left to their own subjective judgment when it comes to nearly every aspect of the development of an opinion of value.  This is in stark contrast to what the National Association of Realtors teaches but whatever.

So to answer your question, neither.

Everything is going to be hyper specific to your local market.  sometimes appraisers will need to look for a comparable property that is miles away from the subject.  sometimes they need to look at comps that are of a different architectural style.

but at the end of the day most appraisers are really simple creatures and will often take the path of least resistance that also has the lowest probability of them getting sued.  And that's something to keep in mind for all properties;  appraisers have two nearly equally important priorities:  don't be the subject of a complaint or investigation and arrive at a value that isn't necessarily correct or incorrect but rather, one that is easy to justify to a judge.

Appraisers are very fearful of lenders coming back to them after the borrower has missed months of payments and the market has taken a nosedive.  Yes, there's a very low probability that both of these things will happen within year of the appraisal but again, appraisers are very simple creatures.  Appraisers are also very concerned with the growing number of reconsiderations of value.  This is where a borrower receives an appraisal whose value is substantially less than expectations and believes they have reason or grounds to file a complaint and have value adjusted based on the evidence you provide to the lender. By the way, this is what I do for people. I help people write reconsideration of value reports so that they can get more out of the refinance or whatever else they need.

You have to remember that appraisers have no incentive whatsoever to arrive at an opinion of value that is equal to or greater than your estimated after repair value. They have no incentive to meet a contract price, list price or any price for that matter.  I would argue that this level of unbiasedness is beneficial for the greater good but unfortunately appraisers are all taught differently still, which means that one appraiser can give you one opinion of value that is 10s of thousands of dollars, sometimes hundreds of thousands of dollars different than another appraiser who looked at the property on the exact same day.

Billy Daniel · Answer

Most in our area us the average price per square foot.  However, last year I got burned (lost $8k) by an appraiser who used average value.  It was very non-typical.  I still use price per sq ft in all my numbers though.  (I've also heard that appraiser has completely destroyed his reputation now.)