How does an appraisal get above comps?

[Account Closed]

I'm new to the world of retail appraisals, as previously I've always sold to investors and never allowed for an appraisal contingency. I'm confused how values can go up and if the appraiser is using comps.

I listed a rehabbed property last week. I wanted use the most recent comp (December) for the exact same unit across the street, also a rehab, which was $155K. My unit has the same number and quality of upgrades as the comp (all cosmetic). That's the highest comp but I figured I'd get offers that were close. My agent wanted to push it and list it at $160K. We now have 3 written offers with more coming in, all at $165K or better. I don't understand how we're going to get an appraisal that will work for a lender if it's based on comps. There's new paint, tile, carpeting and lighting, but that's it.

The buyers' agents are obviously advising their buyers to go above asking in order to get their offer accepted. But what's the point of an accepted offer that won't appraise? How does an appraisal move up when it's based on the past (comps)?

[J Scott]

I wrote a long article on the BP Blog a year or two ago about how to give yourself the best chance of getting an appraisal to come in at your contract price. My suggestions involved both quantitative stuff (giving a list of repairs, comps, before/after pictures, etc) and also building a good rapport with the appraiser. Most investors who commented seemed to agree with me, but the appraisers beat me down pretty hard, basically saying that all that matters are the comps and trying to influence the appraisal by being nice to the appraiser is unethical and won't work with good appraisers.

Well, I will stick by my opinion that it's more than just comps. If comps told the whole story, appraisers wouldn't be necessary, as computers could do the job. But, that's not the case. Get 10 appraisals from 10 different (experienced) appraisers on the same property, and you'll get a range of values. It's not that some appraisers are smarter than others (though certainly that's true), but more importantly, appraisals have a component that is based on pure opinion and personal experience.

Further, because appraisal values on a property will generally fall into a perfectly valid range, your goal is to get the appraiser to determine that your property is at the high(er) end of that perfectly valid range, not the lower end. In many cases, the higher end of the range is going to be above what you think the comps indicate, because an appraiser is free to adjust values (to some degree) based on personal opinion.

Why is that? Well, just because one person thinks your house is worth $150K because the three houses next door to yours all all similar and all recently sold for $150K, there's nothing stopping the appraiser from determining that yours is in better condition and giving you an adjustment for that. Also, there can be an adjustment for the date of sale -- older sales in a market trending up can be adjusted downward and newer sales in a market trending up can be adjusted up. You can get an adjustment for age of your house, and one appraiser may adjust up/down a bit more than another (within a standard range for your area). One appraiser may determine that a porch is more valuable than another appraiser (again, within a standard range). There are plenty of adjustments that can be made that affect the appraised value of your property relative to the comps.

All these little adjustments can push an appraisal to a number seemingly higher than the comps, even though a good appraiser will just say that the value is perfectly in line with the comps after adjustments.

Which takes me back to my original point -- if the appraiser likes you, trusts you, and wants to see you get the contract price, s/he has the ability to give you an appraisal that comes in a little higher than the next guy who may hate your guts and want to see you fail. Both appraisals may be perfectly valid and within the standards of good appraisal technique, and I'm guessing that the appraiser often doesn't even realize that their personal opinion of the seller, their opinion of the buyer, their mood that day, their blood-sugar level, etc, all factors into the appraised value.

Okay, this is where I get beat down again...go for it!