Home Appraisals Method in HSV

[Brandon Hardiman]

Looking for advice here from experienced investors in our local Huntsville or North Alabama market. My current strategy for my first properties are BRRRR methods of SFH's. I am having a difficult time nailing down what I believe the properties I am looking at will appraise for after Rehab. This is because certain neighborhoods right now the comps appear to be all over the place even in the last 3 months. If I look at any of the automated valuator(s) online (Zillow, Realtor.com, EZ Value) then it's estimate is much lower than if I look at some of the higher comps in the same neighborhood. Does an appraiser typically look for the 3-5 properties that have sold at the highest value and create an adjusted average from those? Or will they use the lowest? How much thought do they appear to be putting into quality of details such as countertops, flooring, bathroom updates? Or is it more square footage driven? If 2 houses with the same square footage but one is listed at 4 bedrooms, but the other at 3, which the former actually appraise for much more?

I know there are a lot of questions there. But this is one of the topics about this whole process I'm still not completely sure about.

[Patrick Britton]

@Brandon Hardiman  

As a licensed appraiser in the state of Michigan, here are some thoughts:

AVMs and Zestimates mean absolutely nothing to the lender charged with your refinance.  

You asked, “doesn't appraiser typically look for three to five properties that have sold at the highest value and create an adjusted average from those? Or will they use the lowest? And how much thought do they put into quality, condition, etc?”

No, an appraiser will absolutely NOT look for the properties that have sold for the most. They will also not automatically go to the lowest.

The appraiser will use his or her judgment and experience while keeping the Fannie Mae selling guidelines in mind to arrive at an opinion of value. All while maintaining USPAP ethical standards. In short, the appraiser will conduct an inspection of the subject property, drive by the comps and make adjustments customary to the marketplace. So the difference between a 4-bedroom house and a 3-bedroom house, unless it is a super-adequacy and comes at the expense of square feet per bedroom, will require a paired comparison analysis to properly determine any adjustments.

Quality and condition matter SIGNIFICANTLY but are also highly subjective. I suggest checking out this to get a rough idea of what each category means: https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B4-Underwriting-Property/Chapter-B4-1-Appraisal-Requirements/Section-B4-1-3-Appraisal-Report-Assessment/1032992471/B4-1-3-06-Property-Condition-and-Quality-of-Construction-of-the-Improvements-04-15-2014.htm#Property.20Condition

Considering you're looking to do a cash out refinance, be aware that you should expect an opinion of value from an appraiser that lean towards the lesser value.  I know that borrowers pay for the appraisal but it is actually the lender who is the appraiser's client. Appraisers and lenders are on the same side and that side may not be yours as well.  The appraiser's job is not to manipulate numbers to reach a certain opinion of value.

Thanks to a couple of things, the number of value disputes has exploded to the point where a lot of lenders are automatically disregarding any request for reconsideration of value.  Sure, you could request a reconsideration of value with different comps, but appraisers are fighting back hard against this by simply not responding to lenders.  

My advice as an appraiser and as a former realtor and owner of a dozen rentals, four of which utilized the BRRR method, is to hire an appraiser BEFORE going through the refinance process (ideally before buying any property). The value that that appraiser will give you will be irrelevant to the lender conducting the refinance but it is an opportunity for you to learn how appraisers are required to arrive at their opinions. Because it is very different from how Realtors and investors value properties.

The appraisal will be between $400 and $700 so use every nanosecond you can to learn from that appraiser because frankly, that will give you more than information any realtor or any lender or any other real estate investor out there.