I just had the same experience on house we’re buying (in the UK - but the same system as described applies). I had the house fully surveyed (inspected) and valued (appraised) by and independent surveyor of my choosing. The survey was really good in that it pointed out a lot of minor flaws that we wouldn’t have spotted ourselves - well worth the money. But the valuation was exactly what we had already agreed to pay for the property, so I’m glad we didn’t pay much extra for it!
I was suspicious initially, like the OP, but then it occurred to me that this must be by far the most common outcome. After all, what if the valuation comes out at more than what you offered, and the vendor finds out? They might pull out of the deal! Similarly, if it’s lower than what you have agreed to pay, for no really good reason, then the vendor may try to bring a legal challenge against the surveyor. So overall, I’m satisfied with the outcome. I’m certain that if the inspection had turned up a serious defect, the valuation would be adjusted accordingly.
Yes, and it’s working as intended. The purpose of an appraiser (as opposed to a home inspector, which seems to be a major confusion in this thread) is to determine the current market value of a home. Since home prices are determined through negotiation, the very best estimate of the home’s price is an amount actually offered for it in a negotiated transaction. Which means that your offer is by far the largest determiner of the value, and having the appraisal come in at exactly your price is the expected outcome.
The appraisal process isn’t to try and figure out a few $K of difference in some magical “correct value.” You did that for them, while negotiating. Homes don’t have a “correct value,” just a “market value.” The purpose, rather, is to determine if the offer is not a reasonable one for the home (i.e. if it’s likely to be way off – not a few thousand dollars, but tens of thousands of more). An offer that’s dramatically different from the apparent value of the home is problematic for the bank: if it’s too high, the bank will not be able to recover it in foreclosure, and there’s an increased risk of default. If it’s too low, the potential for a fraudulent transaction (or an uninformed seller) is higher. Both are red flags for the bank. Saying that a $150K house should really have sold for $152.5K isn’t the intent(although some appraisers will do that, pretty much to avoid having to explain this all) – it’s having a $150K offer on a house that should be worth $250K that raises flags.
I know that’s how it works, but to the uneducated mind, when you hear “appraiser” you think that it will be someone that will tell you how much the house is worth. And if the roof is brand new vs. 20 years old, that affects how much the house is worth.
It would be like me valuing your 1977 Pontiac Bandit Edition Trans Am without inspecting the engine. There is a huge difference in value based on how it runs, but would it be okay for me to give an appraisal and then when you discover that the car doesn’t run at all I just shrug it off by saying I’m not a mechanic?
A large part of their job description, again to a lay person, is to arrive at an accurate value of the house. You can’t do that without knowledge of the big ticket items.
Most contracts I’ve seen are provisional on passing inspection. Big ticket item issues can let the buyer walk away or negotiate a new lower price for the house. Since the price is adjusted by the cost of the big ticket item, it won’t affect the appraisal, since the bank will be lending less for a lower valued house.
What blew up deals near us before prices started skyrocketing again were things like houses in foreclosure relatively close but in a different type of neighborhood. Having a foreclosure as a comp screws things up royally. Of course if there were foreclosures that were truly comparable that does reduce the value.
Those are things inspectors can’t see - and isn’t what they are there for.
There is virtually no upside for either the bank, or the appraiser, to write an estimate that exceeds the negotiated purchase price, even if the appraiser honestly believes it’s worth more. As long as it comes in at the purchase price, everyone’s happy and the deal can proceed. If it so happens to be truly worth a lot more than that (and that, of course, varies with the market), the bank is thrilled to have that extra cushion.
Thanks for this explanation. I agree that it doesn’t make sense for a bank to quibble over 1-2% of the value. Clearly, there’s a range of reasonable prices, and the negotiation process is supposed to land you at one of them.
However, the process still seems prime for fraud and abuse. Since it’s true that there’s a range of reasonable prices, that’s exactly what an appraiser should return. “This house could reasonably be valued between $135k and $155k”, for example. And if the offer price is within that range, you’re good to go. Most importantly, the appraiser should do so without knowing what the offer is.
If they cannot accurately do so, I would argue that they’re not actually providing a useful service. They’re just overfitting the data to arrive at the desired result. I have no training in real estate, but I’m quite sure that I could mock up a convincing-looking statistical model if I had a target price I wanted to hit.
That said, it sounds like I should interpret a claim that a house appraised at $x to mean “someone offered $x, and the house isn’t obviously worth significantly less than that”.
I think this is exactly what it is. And it ain’t worth $400.
Anecdote: When my grandmother passed, we sold her house. The appraiser said that one of the bedrooms didn’t count because it didn’t have an attached closet. My grandfather had put up a wall to make it more like a living room and that left the closet in the hall outside of the room.
1 sledge hammer=$35k of extra value to the appraisal. It’s a scam.
Oh, absolutely. Appraisers over-appraising properties was a part of the whole mortgage-lending fiasco that got us into the last recession, as are appraisers who will “appraisal-match” a non-offered price. The system was largely unregulated before, and is more so now, and the definition of “unreasonable difference” is smaller than it was.
I’m just pointing out that for houses and similar large-ticket things, the offer is the value, unless it’s unreasonable, because that’s the only way to really set an exact value. The value isn’t a range, it’s the the exact offer. Appraisers don’t so much set values (in this case – they do in others, such as home-equity loans) as sanity check an external process that has already set it.
Putting in a range will only lead to unhappiness. For instance, let’s say he put in a range of $135-155k. If the negotiated price is $155k, then the buyer is going to believe he overpaid. If it’s $135k, then the seller is going to believe he should have held out for more. Either risks the deal falling through, and that isn’t what anyone wants, including the bank.
If the appraiser thinks that the negotiated price is at fair market value or higher, setting the appraisal at the exact amount of the bid makes everyone happy.
Knowing what someone is willing to pay TODAY is a key element in determining current value. Think about it: If an appraiser only used historical data, then a home’s value would never go up, or down.
Also, if he doesn’t know that the offer is for, he risks killing the deal with an appraisal that will ultimately kill the deal (see paragraph 1).
Like I said above, that happens all the time in the Atlanta market. The last 2 appraisers I met with had no idea what the contract price was when they showed up to do the appraisal. If a deal wasn’t occasionally killed by an appraiser, then they would be totally useless.
We had the opposite happen. We lived in a small city in Indiana, and the bank hired someone from Indianapolis to appraise our house. He seemed to have the feeling that anything outside of Indianapolis was just a rural area with no house worth much. It was a college town, though, and prices were higher than they were in the real rural areas where the towns had a population of 1200 or so.
Anyway, the appraisal was amazingly low, and the deal was going to fall through. I called my lawyer and he arranged for an appraiser from our area to come out and give an appraisal, and either the bank accepted that one, or they averaged them, or something, because the bank then called to tell me it appraised out.
Deep down I think the first appraiser was a graduate of Indiana University.
No reason the buyer or the seller need to see the range. Only the bank does. The buyer and seller either find out if the bank is satisfied (offer is within or above range), or not satisfied (offer is below range)
The important part is that the appraiser not know the offer. This keeps him honest. Or—I suspect—demonstrates that he’s providing very little value.
This is clearly not true. Historical data includes the fact that houses both rise and fall in value, and it includes the rates that they’ve done so. It’s not like the appraiser is just plotting a linear trend. And the value of the range is that it can encapsulate both possible rises and falls in value.
It’s not at all hard to come up with a range that’s, say, a 95% to contain the actual market value of the house. That’s basic statistics 101. Now, someone with a better model or a stronger understanding of the local market is going to be able to come up with a smaller range that is still very likely to contain the actual market value.
I agree that knowing the current offer is very helpful in determining the current value. But here’s the problem: The point of the appraisal is to evaluate whether the current offer is reasonable. You can’t use the thing you’re trying to prove as an input to your model!
If the offer is unreasonable, then relying on it is very likely to make the appraisal incorrect. If the offer is reasonable, then you should be able to judge it as such without knowing it beforehand. Otherwise, the appraiser is literally adding no value except as a rubber stamp. It would be sufficient to have someone drive by slowly and verify that there’s actually a house there and it looks like it might have a kitchen.
In most residential bank loans while the bank may contract for the appraisal the buyer is paying for it and a copy will be given to the buyer once complete.
Good luck as a banker telling a buyer that you’re NOT going to give them a copy of the appraisal they have paid for
Define “unreasonable” in this context. It seems you keep thinking there is some discrete exterior “true” price out there. If the offer is valid and in good faith, and the buyer has the capacity to borrow and pay off the loan what is being offered is a relevant data point re market value. In a dynamic market it is not unreasonable to consider it as a valid data point of the trending direction of market value in assembling your value analyses.
I was closely involved with a licensed appraiser for several tears. In some states it’s a closed club where you must be apprenticed to an appraiser and work for years under them before you take a test … that you can’t take unless you’ve been properly apprenticed. The test isn’t hard, but the apprenticeship can be.
You can’t over-appraise a home if the bank is willing to loan that amount. If a buyer will buy it and the bank will loan that amount, that has become the market value of that house. What keeps the whole thing in check most of the time is that the appraiser knows about what the bank will loan, so the deal never gets out of hand, though it happens occasionally. Those over-valued homes screw with comps, but in the end, most appraisals nail what the bank will loan out of necessity. In one sense it’s just justification for the loan … the loan officer can show the appraisal to his/ her superiors and say, “See, it appraised at …”
It’s not true that appraisers don’t know building and construction … many have backgrounds as contractors and engineers, and even the realtors who become appraisers often enlist the help of professional building inspectors if they suspect something is off. The appraiser I knew had to carry a form of “errors and omissions” malpractice insurance, so that if there was an investigation or lawsuit, they wouldn’t be bankrupted by a lawsuit or fines.
The banks usually get what they want, so absolute objectivity isn’t really the goal here, just an expert’s opinion that the bank isn’t taking an unreasonable risk, and if it repossesses the house, it’s worth about what it sold for.
The whole system is just one giant scam. The appraiser that “valued” the house I bought earlier this year didn’t even visit the property. Everything inside the house could have been stripped down to the bare studs with no plumbing and no electrical systems and he would have had no idea. But magically, the appraiser appraised the house at EXACTLY the offer price down to the penny. Must be nice to charge multiple hundreds of dollars to do exactly nothing other than copy the price off the offer contract and sign your name.
I know this wasn’t directed at me, but what you are saying is absolutely true, but at the same time it also makes the appraisal worthless to a neutral observer because the model “predicts” what it has already observed.
Let’s say that I buy a rare baseball card for $10k and pay an appraiser $100 to tell me what it’s worth:
Me: How much is this card worth?
Him: How much did you pay for it?
Me: $10k
Him: Were you desperate for the card, or was the seller desperate for the money and/or had no other buyers?
Me: No.
Him: The card is worth $10k.
Me: How do you figure?
Him: Well, the value of any item is what a willing buyer will pay and what a willing seller will take for an item on the open market.
Me: I see.
Him: Can I have my $100 now?
Although what the baseball card “appraiser” said was absolutely true, did he offer me a valuable service?
I recognize that there are some practical issues with implementing this. However, I think that if we did manage to do so, the system would improve. We’d either get better appraisals, which means fewer loans that can’t be covered by collateral, or we’d get cheaper appraisals since it turns out appraisers can’t actually do much. Sometimes withholding information from people results in better results overall because the incentives improve.
An offer could be valid and in good faith, but still not a reasonable valuation, as far as the bank is concerned. Perhaps the buyer has idiosyncratic reasons for preferring a particular house and is willing to offer significantly more than others are, Perhaps this buyer is simply not good at valuing property. Now, clearly, the house is worth that much to this buyer, but the bank is concerned with what they might get from other buyers if this one defaults.
As I mentioned above, the appraiser doesn’t need to supply a single value. I realize that there’s no one value for a thing; it’s worth what people will pay for it. He should supply a range. I don’t know what the range should be, but if the bank wants, say, a 95% confidence that the offer will be within the range, then they can get an appraisal and compare it to the offer.
The bank already knows what the offer is. They’re trying to get an independent source to verify it. Giving the appraiser the offer just corrupts that source and makes him no longer independent.
Getting an independent appraisal has the same value as using a control group in medical experiments. The point is to test whether the offer is a valuation the bank should rely on. If the offer is not a good valuation, then you shouldn’t use it as input. If it is a good evaluation, then you should be able to determine that independently.
If an appraiser can’t give you a reasonable range of values for a property based on its merits and comparable sales, what good is he? If the range he gives you is so wide that it doesn’t really predict anything, what good is he? Anyone could take an offer value and give you a bogus explanation of why the property is worth that.
OK let’s take your example to it’s real world conclusion.
Increasingly dynamic market, prices are increasing. Data that appraisers have off the state real estate transaction tax rolls has an approximate 6 months lag, possibly more. More recent comps may be available by ferreting out multiple list closings but that involves tracking down the agents for the deals and verifying the MLS closing price data is correct as entered (often it is not) and that no value adjustments or considerations were given beyond the stated sale price (often they are). This also entirely misses for sale by owner, auctioned houses, or other non-agent listed houses that have transacted outside the multiple list.
People are getting into minor league bidding wars over desirable properties. A doctor and lawyer are competing over a waterfront house that last sold for 800,000 2 years ago. The price is ramped up to 1.1 million in the bidding. Both buyers have the credit capacity to repay this amount if loaned. Not that many houses transact at that price range in this market so comps are quite limited. The appraiser has no knowledge of the offered amounts and shows a market value appraisal of 850,000. The winning bidder is turned down for the loan as the house did not appraise.
Buyers have the option of using another bank and they do this time the appraiser that is engaged is informed of the bidding war and the prices being offered. He comes up with a value of 1.1 million and the loan is made.
Result - The first bank was either protected or it lost out on a lucrative loan. What’s your call?
Any appraiser can plug the numbers into a formula and come up with a value. That’s the science. But there’s more to it than just science; it’s also an art, which is highly subjective. Besides, two equally qualified appraisers might look at a roof and one say it’s “average” condition, the other might say “above average.” Lo, the formula has different entries. Who’s to say which one is right?
Please note that appraisers will exclude some sales from the comp list for important reasons. One is if the sale was a foreclosure or not an arm’s-length sale (to a family member, or under duress). This is because it was not a sale voluntarily entered into by all parties. Including such a transaction could distort the valuation.