Who is the appraiser working for?

Question

Hi Everyone -

I am new to REI and am close to doing my first deal. The condo I am looking at seems to be valued between $260K and $280K. I have a verbal contract with the seller to buy it for $217.

The plan is to write the contract to require the property to appraise for $271,250, which give me exactly 20% in equity.

Problem is, a real estate agent friend of mine (who I think is sort of full of it) told me that appraisers will have the sales contract with them, and will not stick their neck out much further than the contract price.

If they are going to stick close to contract price, what good are they? And if they don't say that the property is worth much more than I am buying it for, how do I justify what the "market" price is for this property?

Finally, how do I avoid PMI if my lender says I am borrowing 100% of the purchase price?

Did I miss something when I was told appraisers are "independent"?

Thanks in advance
V-man

N/A N/A · Answer

I did not say that property is never worth more than the sales price. Banks, however, will never lend on more than the sales price but let me clarify. If you have a situation where the agent listed the property low and it sold in a couple of days, it might be a below market sale. I will appraise it for what it is worth however the bank will lend on the lowest number between the sales price and the appraised value. 
Now after the sale is closed, you MIGHT be able to refinance for a higher value although this is iffy in today’s mortgage climate. 
The appraiser is supposed to be protecting the interest of the lender. The lender wants to know that if this property is foreclosed tomorrow, they can get their money back. Say this man is paying 217,000 for a property he believes is worth 280,000. The fact that the seller agreed to 217,000 raises a red flag. Now if I, as an appraiser, see that there are several very recent sales of the same unit in the same project for 280,000 and several active listings of the same unit in the same project for 280,000+, then the value is 280,000.---- Unless my unit needs updating or repairs and the others were in good condition. But say you are in Florida, and these 280,000 sales occurred last September, well the market has significantly depreciated since then and those sales don’t indicate current market value.  In most parts of the US, values are currently depreciating. I see you are in Ohio so you must know this since you can buy a house in inner city Cleveland for 10K all day long.

Frank Gallinelli · Answer

The lender is going to use the lesser of of the purchase price or the appraised value.  In other words, they are not going to give you 80% of 271K if you are buying the property for 217, even if the appraisal does come in at 271.

Lynn Z · Answer

Bought a townhome which the broker stated had a certain square footage.  Kept tracking the sales in this in town project and seeing listings at 1200 square feet knowing that the appraisal I saw measured at 1189.  A couple of years later applied for refinance and stated a fmv for the condo.  First of all, they sent an understudy appraiser.  Told him for investment property it wouldn't be accepted by underwriting normally if he is not licensaed but let him in anyhow.  He straightlined  the measurement for the two large cutouts (upper and lower floors) and there was quite a difference in the value based on the square feet.  Also remember any recent comps of an identical unit is listed at 1200 square feet to boost the price/sq. ft. Supervising appraiser had to come out -- remeasured and, of course, backed up the methodology of the understudy.  Since they can't measure the sides of a townhouse..there can even be a difference in what they count as side width.  Lender calls and yells "BUT IT DIDN"T APPRAISE" .  Not in the mood to hear about the unmeasured space on two floors.  Either pay PMI or bring more money to closing to make up the 80/20 spread.   Guess who coughed up a few thousand more than expected?

Brokers still sell and show townhomes with 1189 sq. ft. for "1200" sq. ft. --
This year the real estate board has decided in its infinite wisdom that the seller not the listing agent nor any other party is responsible for verifying square footage.  Buyers better beware.  Don't fall for the county tax record figures they've been using.  It's just a footprint.  Also, I'm sick of appraisers using known realtor purchases as comps for my property--knowing full well these agents reduce the purchase price by their commissions---diluting the value of your purchase.  Awfully unfair.

Tom C · Answer

Thanks for the clarification. Yes, we can certainly buy these properties at that price. I understand that you are basically looking out for the banks interests, my point is that I am paying you, not the bank. So if you want to verify that the property is worth the purchase price that is great, but I want the FMV, not just what I have seen with appraisers lately. It seems almost like they will do enough leg work just prove the purchase price, but not anything more.

Thanks

Tom C · Answer

Wow Love,

I have a real problem with what you said here. Is this what they teach appraisers in school? If I just spent a week locating a property owner in trouble and needing to sell, then spent another 3 hours haggling with them to get the lowest price. What business is it of the appraiser why or how I got that low price. The situtation you describe above will never allow us to get what the current market price is for a home. You should only take the home and recent comps into consideration. Not the selling price. MHO.

N/A N/A · Answer

I have been an appraiser for 21 years. I also have appraised property for more than the contract price but it has to meet certain conditions. Nothing proves value like the actual sales price agreed upon by the buyer and seller. The first question is, “If the property is worth 280,000, why is the seller selling it for 217,000? Sellers don’t do that typically. How long has he been trying to sell it. Did he start at 280,000 and reduce his price? You don’t say what your location is, but if the sales you are using are more than a few months old, they might not be good indicators of current market value. You need to find sales within the same condo project. That is what the appraiser has to use. If your area is depreciating, as many areas are, condo’s are the first to suffer value loss. Go to ReMax.com. There is an advanced search option  there. They will let you put the name of the complex in there to search. See what condo’s are being actively listed for in your project. If there are none, search the zip code for condo’s and see what condo’s that are similar to yours in age and size are currently being listed for. Look for the lowest ones. They are probably the ones that have been on the market the longest. You don’t want to pay more than the lowest listing. In fact, you will want to pay less. Also try Netronline.com. This might contain the public record for the subject and you might find recent sales in the project there.

Robin Vidovich · Answer

Newbie here to the forum but not to investing. How about getting a 20% loan from the seller. No PMI to worry about.

Lynn Z · Answer

If you ask the lender to loan you 80% of appraised value and you just rehabbed it (bought it as a bargin) the appraiser should do a FMV appraisal not try to bottom out.  You can get 5 loans at the same time.  Same appraiser-Some come out very fair and others so low you don't recognize the comps he's using.   Everything should be above board in stead of "'we're  looking for ____here"  on a house before it's appraised. 
It's a crap shoot.

Lynn Z · Answer

I am opposed to PMI.  I was told that because I had an investor type loan (rental property) that I would have to have 70% ltv proven by hiring a general state licensed appraiser (only could find one appraiser that had that credential in the state capital) or a Broker in Charge (didn't go that route) who would do an appraisal that I would pay for ($475) justifying major renovations to increase the value of the property.  Once that information was gathered the lender "might" consider removal of the PMI.

It's not easy to get rid of PMI and my understandining from someone who should know is that an FHA loan never has to remove PMI from that type of loan.

Appraiser ALWAYS represent the lenders and should you foreclose the lender wants to hedge their bets as well.  You can't rely on an appraiser to help you EVER.   I had an appointment with one last Saturday and he forgot the appointment.  I called the lender and the appraiser called and said he couldn't locate the property.  Now Really.  It's their game.

Scott Miller · Answer

Appraisers have come under fire this year for manipulating/inflating property values for the sake of getting financing.

Inflated values that can not be justified is a contributing factor to the nation's current foreclosure ratio.

If you are seeking 100% financing, you would not be required to pay PMI (that is the whole purpose of the 80/20 loan).  That being said, you might want to reconsider your position on PMI; PMI is now a deductible expense for 2007 assuming that you fall in the allowable income group.

Regards,

Scott Miller