If appraisals are based on comps, how do prices rise over time?
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Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
5yIt'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.
36 Replies
- Realtor · Sarasota, FL · Member since 2015 · 51 posts · 11 votes5y
Appraisers got blamed for inflating property values in the run up to the 2008 financial crisis. Many of them are covering their own necks with their conservative approach. Getting an appraiser to change their home value is tricky. They hold all the cards and are not required to make any changes regardless of how ridiculous their valuation may seem. Especially in this market it is important that they note that there is a shortage of homes and property values are increasing. This requires them to make time adjustments to comparable sales. For instance, if a property sold 6 months ago for 300k and the data suggests the market has been increasing 1% each month, this comp will be adjusted to 318k.
The other part of the appraisal is the cost approach, which should not be overlooked. The cost approach basically puts together an estimate of replacement cost for your home, starting with the lot value. It's my understanding that appraisers are allowed to use 50% of the cost approach in their formula for the homes value.
Case study: I had a listing in a part of town that was seeing quite a few teardowns and new builds. The new builds were getting priced between 1.8 mil and 2.2 mil. A home across the street had sold several months prior for 600k. It was nicer than my listing but the buyer of this home tore it down and was building a new home. We priced my listing at 675k and were soon under contract until the appraisal came back at 630k. By showing the appraiser what they had missed I was able to get them to adjust the appraisal to 3k over our contract price.
Understanding the data points in your market and providing appraisers with facts is the only way I've ever successfully challenged a low appraiser. They do not care that you "feel" it's too low! - New to Real Estate · Joliet, IL · Member since 2021 · 89 posts · 135 votes5y
@Kay March I think it’s a round Robin thing. If a seller puts a house on the market for $120k and everyone else in that area is selling at $120k and someone buys it for $160k, the other houses can raise their price. Likewise, if I buy a house for $20k and fix it up to be around $120k and it looks fresh vs the other houses going for $120k, their value can drop. Homeowners buy on emotion which leads to holes in their pockets while investors look at the numbers.
I read an article about the homeowners from Flip This House or a similar show. A $175k house gets flipped, and is now worth $300k. Property taxes go up, across the whole neighborhood, owners can no longer afford to pay the mortgage with the higher taxes and they have to sale the house, but there are no comps because this house is decked out and fully custom. Takes forever to sale.
It’s all arbitrary, but if you focus on the numbers, they won’t lie to you.
- Rental Property Investor · Corvallis, OR · Member since 2018 · 840 posts · 1k+ votes5y
@Kay March isn’t amazing though that most appraisals come in at the exact sales price.
- Lender · Southwest Georgia · Member since 2017 · 312 posts · 278 votes5y
@Jody Sperling I am good friends with a few appraisers and they tell me all the time refinances are always more conservative. Why?
When you are dealing with a purchase/sale of a home, the most representative value is the price agreed upon between the two parties. So they look at that price that was agreed to and then look for comps to support that price.
As the old saying goes, “It’s only worth what someone will pay for it”.
Hope that helps!
- 5yDan DiFilippoBusiness MemberReal Estate Broker · Fayetteville, NC · Member since 2020 · 251 posts · 244 votes
@Kay March good question.
It's not an exact science. And appraisals do the work of keeping markets somewhat price-stable.
But then there are some variables that are included that account for market direction. So, inventory available, price momentum, average time on market.
So there's some "baked-in" adjustments, then there's also the fact that appraisals are somewhat imprecise, meaning there's ability for drift which will usually move in the direction the market wants, and then the simple fact that if buyers push prices higher with cash increments, it wholly adjusts comps.
- Investor · Pasadena, CA · Member since 2017 · 612 posts · 523 votes5y
Hmmmmm....Ok, very interesting thread and responses. :/
A few nuggets, and others
......not so much :)
Anyway, Here's my educated response to the OP's question.
In general, the Appraiser should be taking into account recent neighborhood market trends (recent sales/comps, absorption, DOM, etc) and current trends (active listings, pendings, cancelleds, expireds, absorption, DOM, etc), and reconciling those trends with the specific Subject transaction.
The conclusions may contribute to positive adjustments to the comps, resulting in an appraised value higher than recent comps.
Simplified Example:
Subject contract price = $102k
Recent sales (same models-no adustments necessary)
Comp 1 - $95k COE (close of escrow) 6 mths
Comp 2 - $97,500k COE 3 mths
Comp 3 - $100k COE 1 mths
Comp 4 - $99k COE 3 mths
Appraiser determines recent market trends are appx 12%/yr or 1%/mth
Time adjusted SP's are:
Comp 1 - $102,820
Comp 2 - $101,400
Comp 3 - $101,000
Comp 4 - $101,970
The Appraiser may be justified in concluding a market value of $102k
That's one way.
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Another way is when a Buyer has the means and desire to pay the difference over the appraised value. Exp: SP = $102k, Appraisal = $100k, buyer pays $2k difference. Now, that sale becomes a new comp at a $102k sales price.
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That said, some Appraisers do not either, have the expertise to properly assess market trends, or spend the time required. or they may be lazy or busy or they may be accepting less compensation and don't feel they can afford to do the work required for a reliable conclusion.
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I might address other "opinions" from previous responses, in a separate post.
- Northern NJ · Member since 2017 · 69 posts · 45 votes5y
@Kay March 2 of the 3 were being purchased with conventional owner occupied loans. The third was an investment property
- Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes5y
Originally posted by @Todd Powell:
@Kay March isn’t amazing though that most appraisals come in at the exact sales price.
Not really since the best 'comp' for your sale is the current contract price. If an appraisal is an opinion of the probable value of a sale that would occur as an arms length transaction, shouldn't your value come back at that purchase price more or less? That's not to say that the appraiser can't influence that value in some way, but generally they are just looking to confirm that the price you offered is reasonably within line for the market.
- Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes5y
@Kay March Buyers paying over appraised value with no seller concessions.
- Member since 2021 · 1 post · 0 votes5y
The Skinny: Appraisers do not dictate prices, they react to changes in prices. Also - they factor in much more than static past sales prices into their guess at current market value, allowing for appraised values to be higher than past sales.
First it's important to recognize appraised values are not the same as fair market value (which is the truest value of real estate).
Fair market value is how much a willing/able buyer is willing to pay.
Appraised value is a guess at what the true market value might be.
For the purposes of financing, appraisals are used to justify what a buyer offered. They want to make sure their borrower isn't getting too crazy/desperate and offering way more than what the next buyer would offer if the borrower defaulted and the bank foreclosed on them. Clearly these are highly subjective and difficult to pinpoint. As others mentioned, appraisals aren't typically ordered for cash buyers or borrowers who are putting a large percentage down. In both cases homes could sell for more than than they would have appraised for, and much more that past home sales. This increases future appraised values that look at past sales.But even if none of the comps were cash/waived appraisals...appraisers can adjust sold comps upwards when computing averages, factoring in changes in supply/demand. not only based on comparing property condition, but also by adjusting on differing market conditions from when they sold. So if a sudden increase of buyers moving into the area happens, and builders cannot pop up new housing fast enough to satisfy the increase in demand, there may be more buyers per listing than when the past comps sold. So the appraiser can retroactively inflate the past sales numbers to reflect current market conditions to compare apples to apples.
So as long as a bunch of buyers are going crazy offering way higher prices than past sold comps, suddenly the appraiser can consider the crazy offer a normal, justified offer. The bank can rest at night knowing they can take back the house and sell it to someone else to get their money back if needed.
Some appraisers even calculate in the buyer's offer amount when calculating area values.... because it's a reflection of how much a willing buyer is offering (fair market value).
Even further... some appraisers will even consider when it's a bidding war and multiple offers were in the ballpark of the winning bid, thus justifying the winning bid based on how other rational buyers were willing to pay even when past sold comps were much lower.
Another reason sold comps cannot be treated as static prices is due to the dollar consistently losing it's value. In Gainesville Florida, the average real estate age is 36 years old (1985). Since then, the dollar has decreased in buying power by 60%. Since 2017, the USD has decreased in buying power by 10%. So even if the house was in the exact same condition today, and there was zero difference in supply of homes or buyer demand... the house that Vet bought from you two years ago would cost them 10% more today.
So the ideal appraisal by a good appraiser should be considering not only past sales, but also current market conditions and their anticipation of near future market conditions. - Member since 2020 · 117 posts · 56 votes5y
@Kay March The short and sweet answer.. People bidding on homes with emotion.
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