Rarely or NEVER in this market trust an appraisal... here is why

[Richard Freedkin]

Unless you know methods for extrapolating what the true market value is from being able to read and dissect an appraisal, do not under any circumstances take the value from an appraisal and expect it to be true (unless you are in an upward value market)

I will attempt to quickly go over one of the most important points to reading and understanding an appraisal that should help you in determining value when negotiating with sellers.

Lets take a look at a particular call that I had just today that illustrates so well what I am talking about.

This student had just gotten an option on a deal that he thought was worth $1,100,000.00. He based the value on an appraisal that the seller had just had done within the last 30 days. Of course the seller based their estimation of the value of their home on this “Recent†appraisal.

The question is, was this appraisal really “Recent� Well the date on the appraisal may have been, but lets really look at the factors that determine if this is really the case.

The 3 comparables that the appraiser used were from August 2008, August 2008, and October 2008. Now those are the dates that the sales actually CLOSED. The closing date is NOT the date that actually established the value of those deals. The dates those contracts were signed to purchase those homes is the real true comparable date. It’s just that it probably took 45 to 60 days to actually get financing and close those deals. The problem is that the appraiser only has the closing date as the date he can use for the appraisal. He or she really has no idea of when the actual contract was signed to purchase those homes. Now those are typical dates you should use for “Re-Sale†transactions and in the case above, the comps are more realistically from June, June and August. So even though we have an appraisal dated within the last 30 days of this article, is the appraisal really recent? NO – the appraisal is actually approximately 9 months old. How far have values fallen in your area over the last 9 months? Should that percentage be applied against the value on this appraisal? You Betcha!!.

Now if the comps are new construction comps, you need to be very critical of the dates that established the real values of these homes. For instance, if you sign a contract for a builder to build you a home, it typically may take any where from 6 months to 1.5 years for that home to be completed. Again, the appraiser will use the closing date as the date of the comp. But the actual contract that was signed to purchase that home at that price may have been signed over a year ago! In a downward trending market such as the one we are in now, this could mean that home values could have slipped 20 – 30% or more just between the time that the buyer contracted the builder to build the home and the actual date that it closed. Many buyers have backed out of those deals and forfeited their earnest money and of course those deals never show up as comps. But for all the others that actually went ahead and closed on their new home purchase, if those are comps used in the appraisal you are reading, just understand that the value being shown could be as much as 1.5 years old. Do you think the recent date on the appraisal really means it is a good estimation of recent value? Of course not!!

I have saved some students a tremendous amount of time and money analyzing their deals with them using many techniques, but this is one that comes up time and time again. Showing them where they may have gone wrong evaluating an appraisal has saved many students from making a bad deal that could have potentially cost them thousands upon thousands of dollars.