Challenging an Appraiser

[James S.]

Hi guys,

Just wanted to share a small success story on challenging an appraiser, mainly because before I just (successfully) did it this week, I honestly wasn't sure if it was a thing you were "Allowed" to do, much less if it actually worked.

Just for background; I was looking to do a cash-out refi on a property. The home in question was a 3-unit in NH, with gross rent of 72k, and we were looking for a 600,000 appraisal. Being that it was in a small town of only 4000, the comps I (and the appraiser) looked at were from the next town over, of about 30,000 people.

The appraisal came back at 525,000....so 75k short of what we were looking for. Looking at the comps, I knew something was wrong right away, even with not knowing the actual practices of how appraisers really come to their values. I simply looked at the average of price per unit, GRM, price per bedroom, and price per room that he figured out for the three comps. Then I looked at the numbers he valued our property at, and he used substantially lower values for each of these figures, while giving no justification for why he chose those lower numbers. For instance, the average price per unit of comparable properties was $225,000 yet he used a valuation of $175,000 for my property. Or the average GRM of the subject properties was 116, and he used 86 for ours in calculating the income approach method of valuation. One of the comps was even well over a year old (and happened to be my next door neighbor so I knew intimately about the quality of the property and the rents), and the appraiser had ignored, or missed, better comps.

Being that I was going to have 80k less cash than I thought was a bit of a problem, so I resolved to challenge the appraisal as it just overall seemed sloppy, and very out of line with what I thought the value should be.  I simply wrote up a list of comps from the area, showed why they were more accurate, what made them more in line with the subject property, and roughly adjusted their prices according to the adjustments the appraiser had done (for things like sq footage, garages etc). Then I went over the three comps specifically, and why the comps the appraiser chose were worse and less like the subject property than the comps I came up with. Then I pointed out the discrepancies in the amount per units and the valuation he used on our property. I think this part was key. I emphasized repeatedly that no justification was ever given for any of these lower values. And that he needed to justify his reasons for doing so, whether they were some weighted aspect he didn't list, some secret formula he used, or just gut feeling.

I sent it off to my loan officer, and when the appraisal came back a few days later, the value had magically changed to 600k. He had added a comp that sold for 750k to balance out his equations (I believe he could not use the comps I listed, which were more accurate, due to how bad that would look professionally or ethically), and STILL lowered the value of our property (per unit, per room etc) relative to the comps, but not by enough that it didn't get me the value of 600,000 that I wanted (using the metrics of the comps, my place is valued between 675-700k). I think this was pure laziness, and rather than being forced to justify his amounts, he just went and found some reason to change the values without having to do extra work by adding a higher priced comp. This is why I believe demanding justifications for the lower values was a key point in getting the appraisal changed.

My point in all of this was that if an appraisal comes back low, look it over carefully and see if something to you, as a layman, sticks out as off. You don't really have much to lose in challenging a low appraisal, and making sure you have good data to back up what you think the value should be. I was worried I'd be laughed out of the room by the bank or appraiser, where they told me how naive I was and how appraising really worked. Instead the appraiser changed it without really refuting any of the points I brought up, and the bank just said "nice work" cause now I get to give them more money after they give me more money.

So try and challenge the appraisal, I don't see how it can hurt.

[Patrick Britton]

@James S. congrats with your "victory." I've encountered many lazy appraisers in my life and while I cannot defend what this one did to you, it's worth mentioning that for residential properties (under 4 units) the price per unit, GRM, price per bedroom, etc., doesn't matter. Appraisers are required (wrongly IMHO) to use the sales comp approach for any property with 4 or fewer units. So this appraiser is forced to compared 3-units to other 3 unit properties. All the financial factors with respect to rent are frankly and again (IMHO) wrongly dismissed.

[James S.]

Originally posted by @Patrick Britton:

@James S. congrats with your "victory." I've encountered many lazy appraisers in my life and while I cannot defend what this one did to you, it's worth mentioning that for residential properties (under 4 units) the price per unit, GRM, price per bedroom, etc., doesn't matter. Appraisers are required (wrongly IMHO) to use the sales comp approach for any property with 4 or fewer units. So this appraiser is forced to compared 3-units to other 3 unit properties. All the financial factors with respect to rent are frankly and again (IMHO) wrongly dismissed.

Thanks for the reply Patrick. That's actually what I thought, but he was using all those things, GRM, price per unit, etc. to justify a price via in the income approach. But if they can't be used legally, than why are they even in the report to begin with? For instance, he dismissed the cost approach off-hand as impractical because there is no comparison to the home (my mason told me the brick-work alone in this building would cost over 2 million to do today, and my carpenter said the interior wood which is all mahogany would be another million). So then why did he not do the same with the income approach? Like I said in my first post, I really have no clue about the world of appraising at all, other than to know that they are usually prima facie my enemy in this game. Is there a larger regulatory body that mandates only using the sales
approach? It seems odd when comparing rental buildings, which are ONLY bought for the amount of income they provide, on anything other than the income they provide.

For the sale approach, there was only one three unit building sold in my area in the last 6 months, so he used a 5 unit and a pair of two units instead. So he couldn't even get an accurate picture of value if he wanted, which is why it would seem the income approach should make the most sense. I'd love to know the justification for this rule; I know someone however many years ago arbitrarily split the world into 5+ and under 5 units, but it seems like slavish loyalty to this principle isn't helping anyone make the most informed financial decisions?

[Patrick Britton]

@James S. I totally, 100% agree with everything you said. The arbitrary split after 4 units is asinine quite frankly. I think that any income generating property, perhaps even some single-family properties, should be valued using the income approach. But as much as I've been screaming about this for a few years it has done absolutely nothing.

Reading more of your reply it looks like there is a serious amount of unprofessionalism with that appraiser. There is no way in the world that appraisers are supposed to compare duplexes to five unit apartments.  No way.  This tells me that most likely the appraiser was desperate and also possibly very poorly trained and educated. I really think this warrants a complaint to the highest level, whatever that might be in your state, at the very least. Clearly, when the lender reviewed it and sent it to the appraisal management company for additional review they didn't entirely disagree with you.  In fact, I wouldn't be surprised if the appraiser was reprimanded in one way or another.

While I never like to defend anyone's lack of expertise or professionalism, in this case I wonder if maybe there's something else going on. Perhaps with the appraiser personally?  Perhaps, he is overworked considering the insane number of refinances going on and the dwindling number of appraisers capable and allowed to appraise multifamily properties.  It could also be that the appraisal management company didn't use a properly qualified individual to appraise your property. In fact, that could very well be the case.  Lucky you :)

[Jeremy Wirths]

@James S. congrats on your successful challenge! The numbers don't lie but they have to be accurate. Was this in Dover?

[James S.]

Originally posted by @Jeremy Wirths:

@James S. congrats on your successful challenge! The numbers don't lie but they have to be accurate. Was this in Dover?

It was not, though the comps used were. The appraiser was actually from Mass (we were using a Mass bank), which was the first sign something was wrong, as they weren't local to the area.