Why the Odd Appraisals?!

Question

Hello everyone!My investment partner and I are on the BRRRR train and have noticed that appraisals seem tightly influenced by offers. We expected a recent wholesale deal to appraise 20-30% higher than our offer. It matched our offer exactly. Recently, his cash out refinance deal appraised at exactly what he told the banker he thought it was worth. Is this by happenstance? Beyond upgrades, have others learned to have a perceptible influence over appraisal outcomes particularly during cash out refinances? Thank you for your thoughts and insights!John

Chris Mason · Answer

The refi is a random coincidence.The purchase ones are not a coincidence -- when my processor orders an appraisal, he's uploading the purchase contract for the appraiser to see. If you read the definition of 'market value' contained in an appraisal report, it makes sense that it would hit exactly the contract price 95% of the time.

Joseph J DiFranco · Answer

@Joe Cassandra, I'll speak up and take offense to your comment. Appraisers like myself and many I know are hard working and knowledgeable in their marketplace. Sometimes producing good work means the parties to the transaction are going to be pissed off. The role of the appraiser in the system we have is to provide greater stability and confidence in the market, protect the lender and prevent abuse of the system. We are NOT here to make a particular deal work for you. If you think an appraiser is lazy, or not competent in your market, don't work with that lender, or request another appraiser in the future. Oftentimes smears of the appraisal profession are simply an expression of overreaching and/or unrealistic expectations on the part of owners. Any good investor has a handle on market value and doesn't have to pressure the appraiser for higher value.

Chris Mason · Answer

I concur with this. A lot of it is driven by Realtors. That vary rare time that a purchase appraisal comes in short, the listing agent practically turns into a robot reading a script. The appraiser is an idiot, bla bla bla. Auto pilot. Doesn't matter if the appraiser is right or not, that listing agent has a robotic reaction as if programmed in. The most common fallacy that homeowner's make, is basically applying accounting logic to real estate values. The thing was a $75k upgrade, doesn't that mean it adds $75k in value? To an accountant, sure, maybe, that's very close to the concept in law of the "legal fiction." But not necessarily to the actual value of the real estate, the world of non-fiction. If the kitchen was only 8 years old and you did a $20k remodel on it, there's no way I'd expect that to add $20k in value. Contrast that to the flipper installing the EXACT same kitchen after squatters tore out all the copper and oven and all that, the end-result kitchen there might have been $30k to do instead of $20k, but the value-add is more like $100k, since a house without a kitchen can't get a Fannie loan, driving value waaaaay down.

Joe Cassandra · Answer

I've found if a house is within 5-10% of comps...the appraiser (unless they're a tightwad) will let it slide through. Especially when there's cheap money from banks being thrown around. Now, it may get a little tighter. Appraisers are lazy. If you show them comps and the cost of your improvements, etc., they'll take it all into account. A good selling agent will do that. ***Refinance appraisers are a little stingier.

Joseph J DiFranco · Answer

When an appraiser sees that a property has been exposed to the market, and the contract price is within an acceptable range, they will usually go with the contract price for the value, so the market itself has a lot of influence. That being said, if the property is clearly worth more than contract price, thats what I go with, but not all appraisers will do that. Similar for cash our refi, although technically the banker should not be providing any value target to the appraiser. If at all, it should come from the homeowner. There are still appraisers who are "hitting numbers", but its bad practice in my book.

John Prucha · Answer

@Joe Cassandra thanks for the tips, I'll definitely give your approach a try next time and provide some comps and the rehab costs.

John Prucha · Answer

@Chris Mason thank you for your reply, I'll have a look at the definition of "market value". Cheers!

John Prucha · Answer

@Joseph J DiFranco Thank you for your response, it's helpful to know there is a spectrum of practice out there.