If appraisals are based on comps, how do prices rise over time?

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If appraisals are based on comps, how do prices rise over time?

Kay March
Gainesville, FL · Member since 2013 · 127 posts · 21 votes

This is a technical question that arises from the painful experience of having an appraisal come in low. It happened two years ago when a VA appraiser, citing comps, said that the price my buyer had agreed to pay for my single family house was too high by $10,000. Today, two years later, that house is worth about $40,000 more than the price my buyer was allowed to pay. So can someone please explain how prices in general can rise over time if appraisals are based upon comps?

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Jim K.
Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
5y

It's all a scam. There has never been, nor will there ever be, a fair appraisal. There are only lucky and unlucky ones for the people who order them and/or are forced to endure them. The industry is poorly regulated, the appraisers are susceptible to various pressures, and the job is to put a concrete number on an abstract notion. It's a scam. I've never met a single one of these cats I respected -- my opinion is not about to change now.

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  • Jody Sperling
    Omaha, NE · Member since 2020 · 611 posts · 665 votes
    5y

    Appraisals are still one of the leading thorns in the industry, and I sometimes question their ethicality. Often, but not always, appraisers will evaluate a property much more generously if it's selling from one third-party to another third party. Appraisals on refinances are always more conservative.

    The beauty is, if you are ready with comps of your own and a well-reasoned justification for contesting an appraisal, you can ask for a second opinion and get the appraisal reevaluated. I've seen people win these requests in cases where a logical request was made.

    At the heart of your question though, it's sadly too subjective. One appraiser is willing to participate in inflating and appreciation, while perhaps the one who goes to your house is extra conservative in his numbers. It's a crap deal. Sorry for your setback!

    6Reply
  • Jeffrey Donis
    Investor · Durham, NC · Member since 2020 · 1k+ posts · 691 votes
    5y

    I agree with @Jody Sperling. Whether or not the bank gives you the loan, an investor can still finance the gap with their own capital. Also, there are people buying all cash at or over listing price. That is why the property value can increase. 

    4Reply
  • Dustin Allen
    Real Estate Agent · South Lake Tahoe, CA · Member since 2016 · 680 posts · 644 votes
    5y

    @Kay March

    Cash sales are comps too. Appraisers will also know when there were 15 offers on a house and can take that into account when doing their appraisal. 

    2Reply
  • Reid Chauvin
    Lender · Nashville TN - Licensed in AL AR DC FL GA LA MD TN, TX and VA · Member since 2021 · 583 posts · 338 votes
    5y

    Over time, home price growth occurs because of inflation and supply/demand. Comps for the purposes of an appraisal are also supposed to be the most recently sold similar properties. So at the time you were selling, the comps in your area were going for around say $200k. 2 years later, homes are in higher demand and people are willing to pay a bit more. As soon as that first comparable home in your area went above $200k, your home increased in value.

    As said above, the buyer can pay above the appraised value, they just won't be loaned money above the appraised value. The buyer has to come up with the difference out of pocket. This is happening a lot right now (due to low supply and high demand) and is main reason for the rapid home price appreciation. 

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  • Joe SplitrockPro Member
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    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    5y

    Appraisals include adjustments for market increase. It can still be a problem, because the adjustment may be a smaller percentage than the actual growth in a fast growing market.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Joe Splitrock:

    Appraisals include adjustments for market increase. It can still be a problem, because the adjustment may be a smaller percentage than the actual growth in a fast growing market.

    VA and FHA are tougher on comps and values than conventional.

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  • Michael Chiafulio
    Investor · Las Vegas · Member since 2019 · 14 posts · 9 votes
    5y

    @Jay Hinrichs In my experience, Conventional and FHA appraisals are tougher than VA. VA appraisers will review comps over a larger area which can often help a property appraise higher than FHA/Conventipnal.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    5y
    Originally posted by @Michael Chiafulio:

    @Jay Hinrichs In my experience, Conventional and FHA appraisals are tougher than VA. VA appraisers will review comps over a larger area which can often help a property appraise higher than FHA/Conventipnal.

    OK  I guess when I really look at this  its the fha ones that have given us heartburn and low ball appraisals..  

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  • Kay March
    OP
    Gainesville, FL · Member since 2013 · 127 posts · 21 votes
    5y

    @Michael 

    @Michael Chiafulio and @Jay Hinrichs, thanks for your replies. The appraiser that I referred to in my original post was from the VA. He's the one who said that the price my buyer had agreed to pay for my single family house was too high by $10,000. As I said, today, two years later, that house is worth about $40,000 more than the price my buyer was allowed to pay.

    0Reply
  • Sean McCluskey
    Rental Property Investor · Newport Beach, CA · Member since 2017 · 218 posts · 138 votes
    5y

    @Dustin Allen how does an appraiser know the number of offers? Is that a field that agents fill out in the MLS listing for the house?

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  • Yue Lehman
    Realtor · Fresno, CA · Member since 2020 · 87 posts · 41 votes
    5y

    @Kay March

    BP had a show with a female guest who is the superstar rehab manager. I can't remember the name or the show number, but in the show, she said she's respectfully challenged the appraisals on multiple properties after she's completed the rehab, with solid comps that she provides as reasons why they arraised value should be higher. The bank has often accepted her "appeal".

    Aside from that, buyers still buy properties with or without the appraisal, some offer cash, some borrow extra money from family, some negotiate with the sellers. The comps for single family homes are based on past properties that have closed (how much buyers are willing to pay), not exactly what the banks say they're worth.

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  • Dustin Allen
    Real Estate Agent · South Lake Tahoe, CA · Member since 2016 · 680 posts · 644 votes
    5y

    @Sean McCluskey

    Because they usually talk to the listing agent to gain entry and they get to see the contract. If there is seller multiple counter offers, they’re going to ask about it.

    It’s happened to me before and they mentioned in the appraisal that there were multiple offers.

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  • Sean McCluskey
    Rental Property Investor · Newport Beach, CA · Member since 2017 · 218 posts · 138 votes
    5y

    @Dustin Allen OK thanks, that makes sense. I haven't bought any of my rentals on market with an appraisal contingency so I have not had that experience. Only refi appraisals for me!

    1Reply
  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    5y

    When the market is rapidly appreciating appraisals can be an issue since appraisers are pulling older comps which are lagging indicators. In many cases the buyers will bring in extra funds to make up the difference or get a different loan from the bank (agreement from all parties in the transaction).

    Example. Buyer is in contract for $200k and home appraises at $190k. Buyer is putting 20% down to make the purchase. The bank will lend up to the appraise value of $190k. Buyer brings in $10k to make the deal work. In a case the buyer does not have an additional $10k to bring the bank. The buyer can finance more from the bank and get a different loan as long as they qualify. If its a VA or FHA loan probably wont work if buyer doesn't have the funds as the buyer is already at the financed limit.

    Over time buyers come in new price floors established and prices continue to climb because of supply and demand. 

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  • Jim K.
    Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    5y

    It's all a scam. There has never been, nor will there ever be, a fair appraisal. There are only lucky and unlucky ones for the people who order them and/or are forced to endure them. The industry is poorly regulated, the appraisers are susceptible to various pressures, and the job is to put a concrete number on an abstract notion. It's a scam. I've never met a single one of these cats I respected -- my opinion is not about to change now.

    6Reply
  • Michael Plante
    Deland, FL · Member since 2017 · 2k+ posts · 1k+ votes
    5y
    Originally posted by @Jim K.:

    It's all a scam. There has never been, nor will there ever be, a fair appraisal. There are only lucky and unlucky ones for the people who order them and/or are forced to endure them. The industry is poorly regulated, the appraisers are susceptible to various pressures, and the job is to put a concrete number on an abstract notion. It's a scam. I've never met a single one of these cats I respected -- my opinion is not about to change now.

    BINGO!

    1Reply
  • Ian WalshBusiness Member
    Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
    5y

    People pay more than the comps in the same condition/style.

    0Reply
  • Dan Maciejewski
    Realtor · PInellas County Largo, FL · Member since 2016 · 902 posts · 810 votes
    5y

    Often people will pay more that the appraised value. The only people that technically can't pay more than appraisal are the ones that are putting every cent on the down payment AND have a very high (maxed out) loan to value ratio, ie FHA and VA buyers.

    If you are putting 20% down on a house but the lender will lend 95% LTV, an appraisal that comes in 3% low only changes the LTV from 80% to 83%. If the buyer chooses to not pay more to keep the LTV 80%, then their payment changes a bit. They can also add more money.

    Then there are cash buyers.  They don't care about appraisals.  Some agents like to tell sellers that cash buyers are more likely to get an appraisal, but in my experience, anyone that can amass a few hundred thousand to millions in cash is pretty confident that they can value their own purchases.  

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  • Luka Milicevic
    Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes
    5y

    Appraisers adjust for market conditions too.

    I had this same question years ago actually. I thought how is it possible to have house prices go up if appraisals are based on past sales....

    Appraisals as a whole don't make sense to me. Someone in the free and open market is willingly paying $x amount of dollars and the appraiser comes in says it is worth LESS than someone is willing to pay. How is that possible? Some argue that it's bc people are buying with the banks' money and not their own. At the end of the day, they are the ones that are going to be paying the debt off, and not to mention if they make up the difference between appraised value and purchase price. 

    It just doesn't make a whole lot of sense to me

    2Reply
  • Kiki Helland
    Investor · Castaic, CA · Member since 2015 · 78 posts · 16 votes
    5y

    Do you think this is all driven by lenders and what appraisers do to "fit" the numbers.  I would think that lenders who in turn sell their loans stand a lot to gain by having "equity" or market value to sell.  Not sure if I see it right, but it seems all lenders are selling out their loans. I would think it plays a role in how appraisals come in.  

    0Reply
  • Account Closed
    Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
    5y
    Originally posted by @Michael Plante:
    Originally posted by @Jim K.:

    It's all a scam. There has never been, nor will there ever be, a fair appraisal. There are only lucky and unlucky ones for the people who order them and/or are forced to endure them. The industry is poorly regulated, the appraisers are susceptible to various pressures, and the job is to put a concrete number on an abstract notion. It's a scam. I've never met a single one of these cats I respected -- my opinion is not about to change now. BINGO! 

    I just sold one of my highly inflated properties (because I believe we're at the highly inflated top of the market & the sky is falling and I want the cash to buy new properties when the crash hits ;-)

     I wouldn't let the agent put a lock box on the door and I had to be there when the appraiser arrived, to let him in. That is my common practice. As a result, the appraiser and I got talking and he asked how we came to the price we were selling for and how many other offers. 

    I just happened to have with me 4 comps at the high end of the spectrum to give to him. It made it really easy for him to do his research and find the number we needed.  The sale closed smoothly and above market.

    An appraisal is two things 1. Something the underwriter can put into the file to justify the amount of loan they approve and 2. One person's Opinion of value at a given point of time. - It's nothing more and nothing less. 

    2Reply
  • Larry S.
    Northern NJ · Member since 2017 · 69 posts · 45 votes
    5y
    Originally posted by @Jim K.:

    It's all a scam. There has never been, nor will there ever be, a fair appraisal. There are only lucky and unlucky ones for the people who order them and/or are forced to endure them. The industry is poorly regulated, the appraisers are susceptible to various pressures, and the job is to put a concrete number on an abstract notion. It's a scam. I've never met a single one of these cats I respected -- my opinion is not about to change now.

    I have been under contract to purchase three properties in my life.  All three purchase appraisals came back at my exact purchase price. One of the purchase prices was $492,500.  What a coincidence that the appraisal came back at exactly that amount, rather than $490k, $495k, or $500k.  

    0Reply
  • Kay March
    OP
    Gainesville, FL · Member since 2013 · 127 posts · 21 votes
    5y

    @Larry S. what kind of loans were involved with those three purchases?

    0Reply
  • Momi Rapozo
    Los Angeles, CA · Member since 2015 · 42 posts · 28 votes
    5y

    @Kay March good question! This is a hot topic with the shifting in the market. Appraises use active listing comps as well which helps reflect the current home price.

    It does eventually catch up. So the historical sales eventually hit public record and the appraisers will factor those sale prices into the final appraised value.

    0Reply
  • Victor Yum
    Member since 2019 · 14 posts · 5 votes
    5y

    I refinanced one of my property back in March.  The appraisal report I received stated that they have adjusted the recent sold properties by 1% per month to reflect the rapid moving, raising market.

    1Reply
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