Appraiser using wrong comps?

[Hannah Joy]

Hi there, I just had an appraisal inspection done for a cash out refi. Subject property is a duplex: 1 side is 5 bed 2 bath, other side is 2 bed 1 bath. 3000 sf total. Comps will be difficult, and he'll be looking at the recently sold houses. He mentioned driving by and taking photos of comps. Most comps I'm seeing are not updated, from the Zillow ads, and ours is fully renovated. If his appraisal comes back low, can I challenge the comps? How do I go about that? 

[Kevin Sobilo]

@Hannah Joy, there are 3 approaches appraisers use to come up with a valuation.

1. Replacement cost approach: Used for things like insurance to determine how much insurance you need if for example the house burns down and needs to be re-built.

2. Income approach: Used for income producing properties and the valuation is based on the income and expenses of the property.

3. Comparable sales approach: Used for 1-4 unit properties and the valuation is based on the recent sales of similar properties.

First off, the appraiser may use both the income and comparable sales approach to come up with the final valuation.

Second, when using comparable sales, they adjust for differences with the properties. So, if the other properties are smaller, or in poorer condition, etc that will be reflected in and adjusted for as part of the appraisal process.

They do try to find the MOST similar properties possible because the less adjustments they need to make the more accurate/useful that appraisal number is.

What I do to try to ensure a fair appraisal is I give the appraiser copies of what I believe are solid comparable sales when they walk through. Saves them a little effort if they choose to use them.

[Hannah Joy]

@Kevin Sobilo

So when he lists the comps used for the appraisal, can I push back at all if it seems like he missed something? 

[Chris Seveney]

@Hannah Joy

You can but I have found rarely does it work.

[Russell Brazil]

Have your agent meet the appraiser and prepare and appraisal packet

[Brad S.]

27yr Appraiser here - in 2-4 unit properties, in most markets, rarely is the cost or income approach very relevant (not going to go into the details why). An appraiser is typically going to rely exclusively on the sales comparison approach and hopefully find relatively similar comps to compare the Subject to. 

Unfortunately if there are not good comps available (as you stated) you may be more subject to the appraiser's skill and opinions. The proper way to approach this appraisal problem is (summarized below):

* find reasonably similar comps - find relatively recent duplex sales in the Subject's market area and adjust for differences, based on market response (i.e. how much more/less buyers would typically pay for certain characteristics like size of units and lot, location, quality/condition, etc).

* In the absence of similar comps - go back in time to find any similar comps, no matter how long ago and adjust for market trend differences (appreciation, etc), as well as other adjustments as typical (size, bed/bath, condition/quality, location, etc).

* Go to nearby market areas/neighborhoods and find reasonably similar duplex sales and adjust for market area/neighborhood differences as required - along with the other adjustments.

* Find reasonable 3 or 4 unit (not more than 4, and they can use sfr's, but those are typically not as good for comparison. Then they would calculate an estimated market adjustment for # of unit differences. But, generally, this is not very accurate.

Anyway, there are a few more techniques they can use, but this gives you an idea of how they should go about it.

So, as to your specific question, YES, you can most definitely dispute the appraisal if you think there are legitimate reasons to. The best way to do that is understand the different processes I noted above and then to provide reliable, reasonable, credible, and factual information to the appraiser as to why they should consider other factors. Example: providing comp/s which are updated similarly to yours, but may be older sales or in a different neighborhood, and discussing why they should be used. Maybe providing additional info on other comps they used, that may not be readily available. Like contacting the realtors involved in those sales and finding out some pertinent info that caused them to sell below market value. Example: a realtor may tell you the property needed to be rebuilt from ground up due to bad foundation, or ?

Anyway, the basic idea here is you should provide the appraiser a reason to reconsider there value and analysis and just saying "mine is better than those," is not good enough. You also don't want to "shop for value," by cherry picking higher priced sales to justify a higher value. In other words if you have to find older sales or sales outside the neighborhood just because they have higher sales prices, then you are losing credibility. You need a reason and data to support your position that your property is worth more. Your opinion vs mine (as an appraiser) is only worth the data you can provide me to support it.

I hope that is helpful
Good luck

[Hannah Joy]

Quote from @Brad S.:

27yr Appraiser here - in 2-4 unit properties, in most markets, rarely is the cost or income approach very relevant (not going to go into the details why). An appraiser is typically going to rely exclusively on the sales comparison approach and hopefully find relatively similar comps to compare the Subject to. 

Unfortunately if there are not good comps available (as you stated) you may be more subject to the appraiser's skill and opinions. The proper way to approach this appraisal problem is (summarized below):

* find reasonably similar comps - find relatively recent duplex sales in the Subject's market area and adjust for differences, based on market response (i.e. how much more/less buyers would typically pay for certain characteristics like size of units and lot, location, quality/condition, etc).

* In the absence of similar comps - go back in time to find any similar comps, no matter how long ago and adjust for market trend differences (appreciation, etc), as well as other adjustments as typical (size, bed/bath, condition/quality, location, etc).

* Go to nearby market areas/neighborhoods and find reasonably similar duplex sales and adjust for market area/neighborhood differences as required - along with the other adjustments.

* Find reasonable 3 or 4 unit (not more than 4, and they can use sfr's, but those are typically not as good for comparison. Then they would calculate an estimated market adjustment for # of unit differences. But, generally, this is not very accurate.

Anyway, there are a few more techniques they can use, but this gives you an idea of how they should go about it.

So, as to your specific question, YES, you can most definitely dispute the appraisal if you think there are legitimate reasons to. The best way to do that is understand the different processes I noted above and then to provide reliable, reasonable, credible, and factual information to the appraiser as to why they should consider other factors. Example: providing comp/s which are updated similarly to yours, but may be older sales or in a different neighborhood, and discussing why they should be used. Maybe providing additional info on other comps they used, that may not be readily available. Like contacting the realtors involved in those sales and finding out some pertinent info that caused them to sell below market value. Example: a realtor may tell you the property needed to be rebuilt from ground up due to bad foundation, or ?

Anyway, the basic idea here is you should provide the appraiser a reason to reconsider there value and analysis and just saying "mine is better than those," is not good enough. You also don't want to "shop for value," by cherry picking higher priced sales to justify a higher value. In other words if you have to find older sales or sales outside the neighborhood just because they have higher sales prices, then you are losing credibility. You need a reason and data to support your position that your property is worth more. Your opinion vs mine (as an appraiser) is only worth the data you can provide me to support it.

I hope that is helpful
Good luck

 Thank you! Very helpful! Is it a thing to hire an appraiser not doing your report to find credible comps beforehand just in case? 

[Brad S.]

Quote from @Hannah Joy:

That's not common, but can be done. It does require paying money and risking it may not make a significant difference to the assigned appraiser anyway. You can also find a helpful realtor to research the data through the mls or a public records database. Or anyone else you may know with mls access. You can look through zillow/redfin, etc and try and find reasonable comps. It gets challenging not having direct access to the data and other tools. 

[Robert Ellis]

Quote from @Hannah Joy:

Hi there, I just had an appraisal inspection done for a cash out refi. Subject property is a duplex: 1 side is 5 bed 2 bath, other side is 2 bed 1 bath. 3000 sf total. Comps will be difficult, and he'll be looking at the recently sold houses. He mentioned driving by and taking photos of comps. Most comps I'm seeing are not updated, from the Zillow ads, and ours is fully renovated. If his appraisal comes back low, can I challenge the comps? How do I go about that? 

 the proper way to solve an appraisal issue as someone who has 500 transactions and represented both sides of a lot of transactions is to get 4 appraisals with 4 banks