How variable are appraisals?

Question

Hi all,

I'm in a situation that's probably pretty common (and where the person in my situation is likely wrong).. maybe someone has some input?

I was looking into refinancing a SFH that I have, in order to purchase another property, but the appraisal came back really low. Most of the time, this situation is due to an unrealistic expectation of what the property is worth, but in this case, I think it might actually be wrong. The house appraised at roughly what I paid for it back in 2011, even though I've improved it greatly (got rid of a hot-pink kitchen, lime-green carpet is now beautiful hardwood floors, and it has a brand new roof). The market in the area should also be stronger today. In fact, it appraised for 20k more back then!

What I think may have happened is that the comparables they show aren't really comparable. All three are smaller than my house, and only one has the same size lot (this one happens to be about 2/3 the size of my house). While it could use a little more polish (small things, like maybe interior paint), it has some major features that those don't have - brick and stone exterior, great fireplaces, etc.

The question is, how variable are appraisals? How much are they based on the appraiser's opinions vs. actual hard facts? How likely is it that a second opinion would come back significantly different (instead of just running the same numbers again)?

Russell Brazil · Answer

Well you've got me on numbers, I've only done about 400 transactions. :)

But the point I'm trying to make is about the subjectivity of the appraisals. 2 appraisers could come to the same property and use different comps and thus arrive at different prices, or value things like bathrooms or square footage differences at different values. An appraisal isn't an exact science, there is art to it as well.

If it were simply science, then it probably wouldn't matter who sold a house, or what they did to prepare a house for sale or how they staged it, as the pricing would remain the same. But we do know that these things matter in reality.

Now it would be interesting to have a study of sales verse refinances done, but I doubt anyone will commission that study, but my anecdotal evidence has pointed me towards a certain conclusion.

Russell Brazil · Answer

Appraisals on refinances are always considerably more conservative than for a sale. The main reason for that is there is no number on a refinance an appraiser is trying to get to, while on a sale they have the sales price of the property and are trying to get to that number.

Chris Mason · Answer

Russ B.,

Because of the "volume game" thing I mentioned above, it's not crazy (when you know a refinance appraisal is in your near future) to be hitting up open houses of your future comps, and getting disclosure packages from listing agents ("Hi Mr Listing Agent, I'm thinking of making an offer, but don't have an agent, and also don't want to waste your time... will you please send me the disclosures?"), and giving that to the appraiser when she or he shows up.

This is relevant market data that appraisers, given how many appraisals they have to do to put food on the table, aren't likely to research for themselves these days.

Because they often lack time to do that research, all they have is what's on the MLS, which is the good stuff about the comp. The disclosure package is what has the bad stuff in it.

Chris Mason · Answer

I don't think it's evidence of unethical behavior at all that purchase appraisals hit the contract price way more frequently than refinance appraisals hit the owner's estimated value.

On a purchase appraisal, you've got a giant data point that is lacking on a refinance appraisal: We know for a fact that someone is willing to pay that price, because we've got a fully ratified contract right in front of us telling us that they will! So we already know market value, the only question is if an appraiser can justify it with reference to USPAP standards & market data.

On a refinance appraisal, all you've got is a homeowner's estimate that sometimes includes emotion, sometimes that they just went to Zillow and got that garbage estimate, or maybe they tell themselves what they want to hear, etc (not saying OP is in this category).

And then stack on top of that, that appraisal fees have not been tracking with local cost of living increases for years (all we did is introduce AMCs to take a cut of the appraiser's pie), forcing it to be a volume game rather than a quality game, and as a human one would expect that someone is going to feel less bad about someone not being able to refinance and save $100/mo (possible consequence of low refinance appraisal), than they will feel bad about a family losing their dream home (possible consequence of low purchase appraisal), and as a result it isn't crazy to think that a human appraiser will spend more time trying to arrive at an opinion of value that matches expectations on purchase appraisals than refinance appraisals.

Russell Brazil · Answer

I think you are not too familiar with how an appraisal works, and you are correct they don't come up with a number out of thin air. They start with the sales price provided to them by the listing agent. There is nothing unethical or unprofessional about it. You can read up on exemptions to appraiser independence as outlined in dodd/Frank or NARs guidance memo on the subject.

When the property is sold the appraiser has a sales price to start with plus a plethora of information provided to them by the listing agent. Anyone involved with the transaction can actually provide them with information per Dodd/Frank, but in practice it is the listing agent. When there is a refinance there is no sales price to start at, nor anyone providing information on value, thus refinanced always come in more conservative than on a sale.

How variable are appraisals?

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