I have never bought real estate. My impression of appraisals is based on the experience related to me by friends during their homebuying process.
Friend #1 makes an offer of $535k on a house. Has to get it appraised. The appraisal comes back at $535k exactly. Appraiser claims to have fancy mathematical models that take into account construction and features and comps and land designation. Yet the odds that it would come back at exactly the offer seem pretty slim. Not $550k. Not $529k. Exactly what was offered. I hear this is quite common.
Friend #2 buys a house at basically the bottom of the market. Is talking later with some real estate professionals, and finds that his purchase is not included in area comps because it’s an outlier (below most other comps). Of course, houses that are significantly above other comps get factored in.
I understand that there is a need for a 3rd party to verify that there really is property and that the buyer and seller are using a reasonable valuation and not defrauding the bank. But it seems that the current system is a pretty poor way of accomplishing that. For one, it seems absurd that the appraiser knows what the price is “supposed to be” and what do you know, it comes in right on schedule.
I’m not sure I’d go that far, but it is an art. During the bubble lots of houses appraised high because appraisers were hired by people who wanted the deal done - kind of like the ratings agencies. Now they randomly pick from a larger pool, but they get people who don’t understand the neighborhoods very well, and so tended to go low. You can’t win.
That’s been my experience too. If they can possibly manage it, the house will appraise for as close to sale price as possible.
Our home appraised for exactly the amount the bank was willing to finance (+down payment, etc.) When we refinanced, we were in a slightly better financial position and the home appraised for at least 20k more than any home in the neighborhood had sold for in a long time. This with a half finished basement and an original 1950 kitchen. We laughed and laughed and laughed and proceeded to NOT max out the refi.
The whole thing is a racket that needs to be completely overhauled. The problem is that appraisals really are necessary to the home buying process. It’s too bad there’s so much wrong with how they work right now.
They do, but buyers almost always need to have a mortgage. Since the house is collateral, the bank has to agree the house is worth what they buyer is paying.
I’m not sure if this is meant to be a joke, but in case it’s serious:
The appraisal is not for the buyer or seller, it’s for the bank. The bank requires the appraisal because they don’t want to loan $500,000 to buy a house that’s really only worth $300,000. If you’re buying a house in cash, no appraisal is required, and many people will skip it.
This is true to such an extent that the appraiser is often hired and paid by the bank, not by either the buyer or seller. (Of course, the fee shows up on the seller’s HUD, so the seller ultimately pays for it.) The appraiser sees the bank as their client.
And that should illustrate to the OP why appraisals are not BS - or at least whey they’re BS that is useful for a particular purpose.
I had to have an appraisal to get my mortgage re-financed by a new bank. I really wanted the refi, and really wanted to work with this new bank. They said my house had to appraise at $157k for everything to work out, for me to be able to refi with them at the prices I wanted.
It was kind of a stretch but wouldn’t be too absurd at $157k. When the appraiser showed up to see the interior I told him flat out that it had to be at least $157k and I really really wanted it to happen, and check out my nice new deck and did you see the landscaping?
I’m not a licensed appraiser, but as a commercial RE agent I do a number of market analyses which are effectively mini-appraisals. Appraisers often call me to double check their numbers as I was the one that did the lease or sale deals they are basing their comparables on.
Run of the mill residential appraisals do have an element of flex in them. This is not to be unexpected as real world real estate market prices also have a significant amount of movement in them. There is no hypothetical perfectly accurate value for real estate because of the flexibility of the parameters. You can get closer when you have huge number of similar comparables, but in reality it’s more of a interpretative statistical exercise than a pure cost accounting determination of value. When you get to the ground level there are often tons of factors pulling values in various directions.
Assigning appropriate weights to those factors* is* an art as much as it is a numbers game and generally requires deep local knowledge of the comparables and even inside knowledge of how the deals went down to arrive at a particular selling price. This is why when banks decide to go cheap and hire low bid outside the area appraisers you often get wildly inaccurate appraisals.
In addition values are constantly in flux due to external factors like the availability and cost of financing, local and regional economic factors, supply and demand of housing within certain pricing levels, individual seller motivation, and it goes on and on. The best you can do is to be close enough to the market that you are within a reasonable striking range of dynamic market value. Imagining there is some “true” value external to these other factors is a foolish conceit.
Bankers aren’t fools and realize perfectly well it’s an imperfect process, but it’s the best one they’ve got if they want to do business. If a bank selected appraiser blows up deal after deal over a 5-10% value differentiation spread the bank has to make a decision whether it’s protecting itself or costing itself business on that risk margin. More often than not if they think this is happening they will de-select the appraiser. Appraisers understand this game and most will try working within the boundaries to be accurate and not blow deals, however here is a limit and if a property has real value issues it can easily get rejected. Deals are lost everyday over low appraisals.
In 2004, during the height of the housing bubble (or close to it), I was selling my condo and buying a townhouse. I had heard there was that funny business going on with appraisals, but unfortunately, I got the honest ones. The townhouse appraised below what I offered and my condo appraised below what that seller offered.
Along with what has been mentioned, the appraisers typically don’t look at the big ticket items. Say they appraise a house at $200k. Well, it has a septic system that needs totally replaced at a cost of $15k. Did they even look at the septic system? Did they even know the house has a septic system? No and no. Did they see that the HVAC system is on it’s last legs? That’s nearly $10k? Did they look at it? No. Did they inspect the roofing shingles? No. They say that they aren’t contractors, but they are fucking appraisers. How can a person tell the value of a house without knowing that information?
But let dead knob and tube be exposed or have paint flaking off of a house built before 1978 and watch the government pens come out. (Even though, as I say, a closer inspection would show that the knob and tube is inactive and the flaking paint is water based)
It irritates me that when I buy a house, I pay $350-$400 for a bunch of nice color photographs of the master bedroom, but not things that actually effect the true value of the house. If you look on the disclaimer, it states that it is simply comparing comparable sized houses in the neighborhood.
Don’t even get me started on # of bedrooms. If I sell my house, I’m going to put up so many chinese walls so I can say I have 24 1X3 bedrooms.
Well, in Indiana, appraisers are state certified and are required to get schooling for their license. There was a lot of funny business as the housing bubble reached its’ height, but in the aftermath, there has been a total crackdown on anything even remotely off.
The reason that an appraiser cannot take into account an old HVAC that will need repair soon, or a roof that’s nearing the end of its life is because the appraisal is for the house as it stands. Period. It would be a violation if they knocked off value for something that will happen in the future. For those kinds of things, you’d be looking at a home inspector.
I run comps all the time as a Realtor, and that’s how appraisals work. They are based on the basics of the house, like square footage and number of rooms, for that area. Some homes are easier to appraise than others, but as I say, it’s based on the house as is at the time of the appraisal.
The bedroom question is different - we have local MLS regs that say what can be defined as a bedroom; generally, it has to be at 6x8 and have a closet. I would look harshly at the Listing Agent on that one though, and also independently check the assessor records.
You are describing what an professional home inspector does re the HVAC, roof, etc. Expecting that an appraiser is going to be knowledgeable about the specific condition of these items just though a cursory and relatively brief visual examination is unreasonable. Appraisers will adjust for visually obvious items and to a large extent they are often going by declarations about the property contained in the sale listing as to what the property is represented to have or not have.
If the property is represented not to have septic system but be on municipal water and sewer they aren’t necessarily going to assume to homeowner is lying. If they see the septic pipes or the jet pump they will know there’s an error, but they are not doing the appraisal as property inspection detectives. If the homeowner or agent tells them the roof is 5 years old vs 10 they will take that at face value unless it is obviously untrue.
An inaccurate appraisal might be problematic, but in this case, the wildly accurate appraisals appear (to me) to be a sign of fraud. It looks like they’re cooking the books to get the number they wanted to end up with.
My Missus manages the loan dept of a local bank. She says appraisers are often sent to insure the home’s value is at least what they’re about to loan on it. They’re OK with him/her “appraising” up-to $$ amount and calling it done. No fraud, they’re just making sure it’s worth is >= to the loan value.
Something else I wonder is… they always ask me “did you do anything to the house? (to justify the change in price, I guess).” I didn’t do much to it, but it had a major high-end kitchen renovation that still looks new. What would prevent me from taking credit for it to jack up the sales price?
That’s what I’ve always heard, as long as the value meets or exceeds the mortgaged amount is all that matters. No bank is going to loan you $200,000 on a property that appraises for $100,000. You can still buy it, if you are willing to put 50% down.
You can buy and sell property for whatever price you want, you can only mortgage property for what the bank allows.
The core issue is that the banks these days sell most of their loans to Fannie & Freddie etc., and these entities set the rules as regards to LTV and such. The banks have to comply with these rules, but it’s in their interests to have the loans nominally conform more than to conform in actuality.
To correct for this, a lot of banks are required to take appraisers that are randomly assigned from a pool of appraisers, and can’t choose their appraiser.
I believe there is a difference between appraiser and house inspector.
The appraiser will tell you what the house is worth - but the house inspector will go in to see if there is mold, A/C problems, lead pipes, etc. that will later come back to bite you.
I think appraisers go by average price per square foot in that area, plus certain other features (pool, tile floors, number of bathrooms, two car garage, etc.). Then they determine condition - poor to excellent - and probably have a good formula to calculate worth based upon that.
Sort of like buying a used car, I would imagine - you have your book, know the going rate for that car (house) and now only need to check the basic condition (fair, good, excellent), mileage, but that doesn’t mean there might not be some major repairs needed down the line, no matter how nice the car looked.
