What did I do wrong? Comps vs. Appraisal

Question

Hello Everyone,

I'm working on trying to close my first deal in wholesaling.  I've managed to get a REO property under contract.  I used the comps that my real estate agent provided to me in a CMA to calculate the ARV value.  The method I used was to look at sales in the past 0-6 months, a radius of 2.5 miles (big house, with big lots), and average the price per sq. ft.  When I did this, the house comps out to be around 2M.  2 of the 3 comps were sold just this past March and the last was sold at the end of December.  I have it under contract for 800k and it's listed on MLS for 1.1M.  The inspection period ends this afternoon and by then, I will cancel the contract.

I had 2 buyers who were more than interested in the property but needed to see an appraisal.  I had the appraisal done, but it only came out to be 1.2M.  The appraisal used just 1 of the properties I used.  Further, all of the properties were from 2011 and one was even from as far back as July 2011.  The one from July 2011 was a foreclosure sale and 3.82 miles away.

I do not understand how there could be such a large variance in my calculated values vs. the appraisal.  I really need to know and understand why this happened so I can avoid this pitfall in the future.

Any advice, expertise, and insight would be greatly appreciated here.  If you want, I can forward to you the complete package which has the appraisal as well as my comps analysis.

Jon Holdman · Answer

As Nathan Emmert shows, you CANNOT use $/sq.ft. Appraiser will adjust prices for the comps based on the difference in size.  For ground floor footage, the adjustment will typically be about one third of the $/sq.ft. price of the houses involved.  Upper floors even less and basement perhaps only 1/10th of the ground floor $/sq.ft.

You cannot rely on a CMA done by someone else.  You need to find ALL possible comps and do the analysis yourself.  This sounds like a very optimistic analysis, based on the highest comps.  You need to look at all the comps and look at the worst ones, not the best.  Appraisers will never use the best.  You hope is they don't pick the very worst.

J Scott · Answer

Didn't you hire this appraiser and pay for the appraisal?  If so, why don't you just chat more with the appraiser and ask why he preferred his comps over the one comps you had originally found.

If you ask questions, you'll get answers.

Nathan Emmert · Answer

Honestly... I wouldn't know how to comp things on the high end, I'm not sure there's a whole lot of logic applied.  How do you put an intrinsic value on prestige, on view, etc etc??

What I will say is scaling linearly on a per foot basis is probably a VERY poor estimate.  Once you get past 4 or 5,000 feet... a foot isn't a foot anymore.  To believe a 6,000 square foot house is worth 20% more than a 5,000 square foot house is a very bad assumption.  They are both mansions at that point.

Bill Gulley · Answer

Agreed J  Scott, and I bet what the appraiser will say is that the comps used were most similar to the subject.

When selecting comps one of the first questions is what is the market expectation for for this type of property? IMO. By that I mean what is the expected market time and how quickly do properties like that move through the market.  $1.5 and 2 MM market is not the same market as 100-200K homes. If there is a significant volume of properties moving through the market your search parameters are the conventional 6 months or less within three miles. For properties that fall outside the norm your search parameters can be expanded beyound those guidlines so that there are enough sales to compare. You could very well have comps over a year old with unusual or top end homes. In commercial, industrial properties you may look back 3 or 4 years and adjust values if necessary as and look to other citys hundreds of miles away, for part of the analysis of say a shopping mall. If there are only 4 malls in town and none have sold what do you do? You have to go out further and back longer until you have similar properties to comp and make adjustments for distances and time. The markey approach may not indicate the best approach in such a case either and you may lean more heavily on the income and construction approach. It's an art as well as a science.

Jerry N. · Answer

Mikel... the appraiser may have initially estimated this higher but then he lower this down closer to the listing price. This has happen to me, I was buying MFH and the appraiser said that he should have appraised that house to 20% more but not to trigger any red flags from bank he only came 10% higher. They appraiser are very careful now but that does not mean he is right. As another example I just have made an offer on short sale house listed for 350,000 my offer was 260,000 then the appraiser  has appraised that house at 280,000 I’m sure he was influenced by my offer.

Account Closed · Answer

Suggestion:  don't send giant files to people who didn't ask for them.  They took forever to download and backed up my email.

You need someone local to help you see why your comps were $800K off.  I'd say your first clue should have been the bank's asking price.  If you think you want to stay in the deal or make a new offer, you need someone local to help you figure out the right asking price, DOM and anything else needed to get a retail buyer.  From what you describe, the interest in the property was from buyers who you gave the wrong ARV to.

Find a local agent who specializes in high end estate props.  Find out what they think they can be done.  And then realize they are sugar coating it, because that's most agents do, and proceed from there with caution.

Account Closed · Answer

Mikel:  what were you selling the property for?  Was the reason you had interested buyers was because you were seling for $1M and they could get in at 50 cents on the dollar?  Easy to find buyers under those circumstances. :)

Hard to say without knowing all the details of the appraisal, but it looks like there might be something there in this deal.  You are under contract for $800K. You ordered the appraisal, correct?  If you got a 1.2M appraisal in that situation that looks like real equity to me.  Obviously you're on a deadline and the EM refund is important, so you'll cancel.  But maybe there was a deal there even without the crazy mis-valuation.

In some markets, the mansion and estate props valuations are more subjective and truly hard to pin down.  If you ordered the appraisal, get the details on why the appraiser used different comps tha

Account Closed · Answer

Comps aside, why are you canceling the contract?  You have a house under contract for $800K that appraised for $1.2M AND you have interested buyers that were interested when your price was higher than 1.2M.  What am I missing?

Did you try to sell the buyers that they were getting in with tons of equity?  Is that why they were interested?

Mikel Graham · Answer

hi everyone,

@K. Marie Poe, my apologies.  I assume everyone has high speed connection these days and didn't expect it to be too much of an issue.  My sincerest apologies.

I appreciate the advice everyone has provided me.  I definitely feel a little more empowered.  I'm a bit disappointed that I was unable to close on this deal at all, but it was a learning experience.

I can't help but wonder though.  In the future, am I always better off getting an official appraisal?  Between the house inspection (300-450) and appraisal (300-350), it seems to be a hefty investment for each POTENTIAL deal that may not even sell.

Hoping my next contract will be my first successful one.

Mikel Graham · Answer

Kristine, thanks for getting back to me.  I'll email you the entire package for you to review that has the appraisal and everything I put together.

And to answer your questions... My asking price was $1.05M (room for negotiation).  Yes, I ordered the appraisal and have already spoken to the appraiser.  They say that the comps they used were the best match.

What did I do wrong? Comps vs. Appraisal

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