Appraisal Valuation so Close to the Selling Price
Ann Arbor, MI · Member since 2016 · 40 posts · 2 votes
Why do appraisals required by lenders for properties purchased with conventional mortgages always - a very high percentage - get valued at a ridiculously close number to the final selling price?
There is no way appraisers are this accurate.
It's almost as if appraisers make backwards appraisals with their comp selection, to make the value as close as possibly to the selling price.
I have done both wholesale and fix and flip deals. Contrary to the comments above, I have not found any of the people that I have worked with to be brain dead, dupes or idiots. Most of the time they are reasonable people that find themselves in a circumstance where they have to move the property quickly or it is having a negative impact on their lives. If they could sell it for retail, they would, but for some reason or another they cannot. Wholesalers serve a segment of the marketplace that conventional realtors normally don't bother with. The same way that @Chris Masonserves a segment of the market that banks don't serve.
An appraisal is what a computer programmer would call a "sanity check." A programmer will have his program test to see if X + Y = 5 by looking at X and Y. If X and Y are 3 and 100, respectively, then it will fail the sanity check and be deemed insane. If X and Y are 2 and 3, it passes and is sane.
The paraphrased definition of market value:
Market value is that sales price that a prudent seller and prudent buyer, each being reasonably intelligent and acting in their own best interests, without undue inappropriate influence, are most likely to come to of their own accord in honest good faith negotiations.
OK, now compare that definition to the sales price on your contract. Does the contract sales price meet that definition? If so, why should it surprise you that the contract price and appraised value are identical? How is this "not accurate"?
When appraisals do NOT hit or exceed contract price, it means the appraiser is saying that someone either is not being "prudent," or is not "reasonably intelligent," or that there must be some "inappropriate influence" like a kickback.
Market value is that sales price that a prudent seller and prudent buyer, each being reasonably intelligent and acting in their own best interests, without undue inappropriate influence, are most likely to come to of their own accord in honest good faith negotiations.
So this is why agents have disclosure agreements?
OK, now compare that definition to the sales price on your contract. Does the contract sales price meet that definition? If so, why should it surprise you that the contract price and appraised value are identical? How is this "not accurate"?
How does wholesaling work? The wholesaler gets a house for a "deal" and quickly sells it for a profit. It's the same house, untouched from repairs, and gets sold three weeks later to a retail buyer, The retailer uses a conventional loan with 15% down. The wholesaler makes an $8,000 profit. The appraiser values the house $8,500 higher then the wholesaler recently acquired it for. Why did the price of house increase so rapidly from three weeks ago?
Primarily because appraisers only get in legal trouble for over valuing a property. So when they know the contract price, why push the value over that amount and risk issues? Although I recently purchased a house where the appraised value came in more the 10% higher than the contract price. But I admit, that is rare in my experience.
How does wholesaling work? The wholesaler gets a house for a "deal" and quickly sells it for a profit. It's the same house, untouched from repairs, and gets sold three weeks later to a retail buyer, The retailer uses a conventional loan with 15% down. The wholesaler makes an $8,000 profit. The appraiser values the house $8,500 higher then the wholesaler recently acquired it for. Why did the price of house increase so rapidly from three weeks ago?
Wholesale deals almost NEVER have a prudently acting and reasonably intelligent seller, period, or they would list with a real agent on the real open market in the real world and turn some real profit for themselves.
That's how it works for wholesale deals. And that's why wholesaling is a get rich quick scheme -- you're finding dupes, idiots, the desperate, and so on, and exploiting them. Let's not pretend that wholesaling is a Good Christian Sunday Charity activity...
I'm not a hater. But I'm also going to call a duck a duck.
The price the wholesaler got it tied up in contract for is NOT, by definition, market value - because the seller is intellectually disabled or senile or imprudent or desperate or divorcing or whatever, and you're here to "help" them.
It's far below market value, and that delta is the wholesaler's opportunity to line her pockets. That is also why it very well might appraise for the REAL market price reflected in the REAL sales price that the REAL buyer is offering.
And the seller is fked out of that difference between what you duped them for, and the actual value.
Primarily because appraisers only get in legal trouble for over valuing a property.
Do they get in legal trouble if they drastically undervalue a property?
Primarily because appraisers only get in legal trouble for over valuing a property.
Do they get in legal trouble if they drastically undervalue a property?
No, not unless there's reason to believe that corruption is afoot or whatever.
But if they give a high value to a property, that the lender then loses money on in foreclosure a few years later, the lender will start looking for BS reasons to sue people... like appraisers.
Hey, let's not get all emotional. Remember that wholesalers have a legal binding contract. Legally a contract has no emotions.
Hi Scott.
I just had an appraisal completed last week for a refi that I am doing on a property that I own. It used both the cost approach and a comparison of sales to arrive at the value. If you have a good realtor representing you, they will likely perform a CMA to establish a sales price for the property you are selling. It's in their best interest to make certain that the property is not overvalued or it will sit on market for too long and not help anyone. Since both the realtor and the appraiser are using similar methods to establish value, it's reasonable to conclude that the two would be close.
Independent appraisals and appraisals ordered by the bank will vary. The appraisal the bank orders is only to ensure the buyers is not paying too much, which is why they always come in a few thousand over the contract price.
I have done both wholesale and fix and flip deals. Contrary to the comments above, I have not found any of the people that I have worked with to be brain dead, dupes or idiots. Most of the time they are reasonable people that find themselves in a circumstance where they have to move the property quickly or it is having a negative impact on their lives. If they could sell it for retail, they would, but for some reason or another they cannot. Wholesalers serve a segment of the marketplace that conventional realtors normally don't bother with. The same way that @Chris Masonserves a segment of the market that banks don't serve.
Appraisal are opinions, BPO are opinions. Inspections some good some bad , not opinions but facts.
Every one looks at things different. Locally here in out market I know one appraiser all FLIPPERS want him to preform the appraisals. Yet the same guys go crazy when banks bring in some one form out side the area. Most of them only see what is sold on MLS which tells me they don't do their homework. As most flips are not on the MLS.
Just had a partner in Memphis build 15 new construction Appraisals sold to various groups and 3 different appraisals with with $40k difference on numbers. So some thing not making sense.
I'm sure I did not answer or help but just my two cents
Alex
Wholesalers serve a segment of the marketplace that conventional realtors normally don't bother with. The same way that @Chris Masonserves a segment of the market that banks don't serve.
That's fair. The question I was answering was about the theoretical framework for how appraisals (do/should/will/may/etc) work in wholesale situations. What I answered is how you'd better HOPE Mr. Appraiser views it:
The discounted price a wholesaler ties it up in contract for does not meet the definition of market value that appraisers use. The language I used that some find objectionable, is why. If that discounted wholesaler price WAS market value, there'd be nowhere for a wholesaler to make money!
The price that you can get a retail buyer or investor to agree to pay for the place comes much closer to meeting that definition (or at least this had better be what you get the appraiser to agree to!). The wholesaler is not the seller (depending on the contract etc), but she has an incentive to act prudently and reasonably intelligently to get the place to command as high a price as possible (a theoretical framework that the appraiser had better agree with or your deal is dead if the appraiser thinks the seller acted prudently and reasonably intelligently to get to THAT value with you!).
And this is actually a good thing for wholesalers. If an appraiser decides that your discounted wholesale price is market value, that just killed your retail deal that pays you - the wholesaler.
So you can agree or disagree with who is or isn't a dupe or dunce, it's not relevant, but what is relevant is that you WANT Mrs. Appraiser to believe that the seller is a dunce, and that your (higher) retail sales price is the price that represents prudency and reasonable intelligence, because if she does NOT believe that then the appraisal will come up short cutting into your profits as the wholesaler.
Chris M. If I wholesaled a deal from a bank, does that make the asset manager a rube or a dupe?
You're focusing solely on dollars and not on other factors that may be at play. Seller wants to leave all the contents in the house? Maybe they'll take less money. They want to close in 2 weeks? They don't want to have to get the house ready for showings? They live out of town? All reasons they might take less than your opinion of market value.
I don't understand the anger aimed at wholesalers from a small but vocal minority here on BP. I presume that you'd have no problem with ancestor paying $5k less for a house than the seller "could" have gotten. If a wholesaler does, why does that bother people here so much?
It's not anger my man. It's what you need the appraiser to believe if you're going to wholesale to a retail buyer using an institutional lender. Your deal is probably dead, or at least your profits just got cut into significantly, if the appraiser does not believe that.
I think I was typing my most recent post above at the same time as you, see if that post adds clarity.
I think there might be some confusion about how wholesaling works. When I re-read your post you seem to be under the impression that the wholesaler buys the property at a discount and then sells it for retail. While this may happen occasionally, I have never seen it. Normally I would get a property under contract and then sell it to a rehabber who will fix it up to add the value necessary to get market rates, or another investor who will fix it up to rent it out.
A common formula used by investors is ARV (market value) x 70% - the cost of repairs. So if the property is worth $100K, with 15K in repairs, I would have to get it under contract for less than $55K. So, if I want to make $5K I would have to get the property under contract for $50K, as I get paid on the margin that I create between the contract price and the $55K that most other investors are willing to pay. This is my market price. Contrary to popular belief, market forces should keep me in check because if I have screwed up on my comparables or rehab estimate, other investors will not buy the property and I stand to lose both my reputation and EMD in the deal.
The only time an appraisal would be needed in this exercise is at the time of final sale, when the rehabber sells the property and the end buyer needs a mortgage, or the investor is refinancing to pull out their capital.
Earlier in this thread I was using the wholesaling as just one example where a property sold for x amount and then a shortly there after without any repairs sold and or appraised for a significantly higher value y. This higher value y is significantly higher than what the property would appreciate in the properties normal markets conditions.
Yes, these are the distressed properties that have value and is one way a REI makes a profit.
I guess I just have a problem with the appraisal process and the sales comparison approach. In a heterogeneous single family housing market no two properties are alike. Yet, an appraiser will select comparables and manipulate prices up or down to get the appraisal subject's value to almost the exact amount of the purchase price. I can't see how an appraiser can get that close to a properties actual purchase price such a large percentage of the time?