Appraisals coming low when refinancing?

Question

Hi guys,

So I have a quick question. Something that is happening to a friend of mine lol.

He bought a house last year as primary home and right now he is refinancing as an investment property. His house just got appraised at 242k. Talking with a new neighbor, who just got a similar home 1 block away a few weeks ago, his appraisal came at 260k.

They went and talk with the bank with both appraisals and the bank told them that the appraisers usually give a low ball when a refinance happens to protect the bank's interest, but when is a new purchase they look at the value market.

Is that usually true? legal? I thought an appraiser should always be unbiased and give a fair representation of what the market value of a home is.

Thanks a lot!

Update: Portland, OR :)

Russell Brazil · Answer

The other thing to point out in the difference between a refinance and a purchase, is that when selling a property, the listing agent will meet the appraiser and justify the sales price.  while with a refinance there is no agent justifying a higher price to the appraiser.

Mark Vejnar · Answer

The comment by @Russell Brazil is unfortunately true; some agents will work hard to influence value and roll the dice as to whether or not they'll be held accountable. Sadly, there are non-Jedi appraisers who may succumb to such tactics. Have your lawyer standing by if this is the case. If your Realtor provides this service please encourage him or her to keep it in their pants.

Some clarifying questions are probably fine - such as confirming arms-length, lack of duress, presence of duress, or unusual circumstances. The appraiser will document these conversations in the work file. A better approach to protect all parties is to put everything in writing and communicate via fax or email.

@Gloria Mirza the contract is vital as it proves the price and terms to which both the buyer and seller have agreed to transfer ownership. It's pretty black and white. The appraiser doesn't have to guess - it's right there on the first page. At that point it's just a matter of support.

Daniel Chang · Answer

@Gloria Mirza Thanks for giving more clarity and knowing that is somehow true. I think @Mark Vejnar did a great job in the last paragraph about that misconception of an appraiser protecting the bank's interest (I think that is the part that threw me off the most). Thanks for your responses!!

Taxes.. interesting, will let him know to check on that!

Mark Vejnar · Answer

@Daniel Chang

The appraisal for a refinance vs a purchase are two different things, even if the homes are identical.

An appraisal for a purchase transaction is more straightforward because a buyer and seller have agreed on price.  It is the appraiser's job to determine if the price is congruent with other arms-length transactions of competing sold properties in subject's neighborhood within a specified time frame. An appraisal for a refinance is completely different.

A value for a refinance is purely speculative. The refinanced property is not exposed to the market. Buyers are not negotiating with the refinancing owner. Agent's are not actively trying to sell the home and provide feedback on how to make it more competitive. It would be reckless and irresponsible to assign a value on a refi that is consistent with the highest priced sales in the neighborhood.  An appraiser typically "low-balls" an appraisal when the sales comparable , income, and cost approaches substantially support a conservative opinion.

It's a common misconception that the appraiser is protecting the bank's interest. Many experienced and skilled Realtors, agents, and loan officers propagate this misinformation unwittingly revealing their ignorance of the appraisal process. Appraisers are completely isolated from most lenders.  Lenders are required to order appraisals from an appraisal management company (AMC) and are prohibited from using any means to influence the appraiser's opinion of value. Appraiser's are prohibited from accepting any work that is contingent on opinions.  Appraiser's are not permitted to advocate.

On the plus side - maybe you can take that appraisal and appeal your friend's taxes.

Kevin Breslin · Answer

Does a low re-fi apprasal lock in that value? Say it looks like I could get 700k but apprasal says 600 does that slow the growth of the value?

Chris Mason · Answer

I'm not 100% certain how accountability works for appraisers (in theory, I'm not supposed to ever even talk to an appraiser...), but ya they get "conservative" with refi appraisals to make up for all the times they have to be "liberal" with purchase appraisals.

Which is big picture how we want it -- a low refi appraisal means you don't save $100/month, a low purchase appraisal means (in many cases) you just lost an entire house.

So really there's no point in griping about low refi appraisals if the trade-off is all the at-value purchase appraisals that let us close real deals.

Gloria Mirza · Answer

Yes, it's absolutely true.  I just went through the same thing.  The appraiser comes up with a number then adjusts the comps to justify that number, it's completely backwards but that's how they do it.  I tried fighting it with the appraiser and got him to increase the amount by 5k because he didn't account for my house having an AC unit.  You can try fighting it and there are plenty of articles about that, but in most cases they wont adjust the number unless there is a blatant mistake like square footage being wrong or something like that.

Appraisals are anything but unbiased.  If they were truly unbiased the appraiser wouldn't need to know why the appraisal is being done.  They would just look at the house, run some comps and come up with a number.

Appraisals coming low when refinancing?

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