Appraisal confusion - opinion of market rent

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Appraisal confusion - opinion of market rent

Caitlin Worrell
Investor · Atlanta, GA · Member since 2016 · 17 posts · 3 votes

Can someone help me understand how appraisers generate the values during the appraisal process? I am reading our appraisal report and trying to make sense of it.

We own a duplex and occupy one of the units. Back in November we had an appraisal as part of an attempted refinance. We estimated that the value of our unit (2 beds/2 baths) is about $2,200, and the opinion of market rent was $1,995. The second unit (2 bed/1 bath) is currently rented at $1,600 a month, but on the appraisal report, the opinion of market rent was $1,500. The appraiser was aware that the unit was rented at that price.

I can understand that the figure would be different for the unit that isn’t actively rented, but I don’t understand how the opinion of market rent would be less than actual rent. Any ideas??

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Mark Vejnar
Investor · Simpsonville, SC · Member since 2013 · 184 posts · 71 votes
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I'm sorry it didn't work out well. That's great that you're able to capture above-market rents, though! You must be doing something right. The appraiser determines value by using three approaches: sales comparison, income, and cost. I could fill the page explaining each and how they are reconciled against each other but Google is your friend. The job of the appraiser is basically to see where the property fits in the marketplace. There's no emotion or advocacy involved. Sometimes buyers hate appraisers, and sometimes it's the seller who is filled with rage, but the appraiser is to remain as objective as possible. If you think about it, the lender is using the appraisal to buy a property sight-unseen. Your underwriter could be anywhere in the world - all they have to go on is the numbers.
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  • Jeremy Pace
    Contractor · Pittsburgh, PA · Member since 2014 · 885 posts · 359 votes
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    @Caitlin Worrell The appraiser is supposed to take the size and features of the space into account, and then compare it against other homes with similar feature in the area.  It is entirely possible that their numbers are 'accurate' in the sense that they have data to back up their claim.

    Often times, the choice of comps is the most key part of the appraisal process.  Do the comps listed make sense?  For example, if your home in a three bed, two bath ... and every comp is a five bed, one bath, then the comps probably aren't very good.  If they are far away (more than .5 to 1 mile) ... not good.  And if they are stale (more than six months old) they are probably not good.

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  • Mark Vejnar
    Investor · Simpsonville, SC · Member since 2013 · 184 posts · 71 votes
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    I'm sorry it didn't work out well. That's great that you're able to capture above-market rents, though! You must be doing something right. The appraiser determines value by using three approaches: sales comparison, income, and cost. I could fill the page explaining each and how they are reconciled against each other but Google is your friend. The job of the appraiser is basically to see where the property fits in the marketplace. There's no emotion or advocacy involved. Sometimes buyers hate appraisers, and sometimes it's the seller who is filled with rage, but the appraiser is to remain as objective as possible. If you think about it, the lender is using the appraisal to buy a property sight-unseen. Your underwriter could be anywhere in the world - all they have to go on is the numbers.
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  • Russell BrazilBusiness Member
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    Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
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    The appraisal is done to limit the risk to the bank. It is not done to create a situation to help you.  Appraisals on refinances are almost always less than the market value of a property.  Appraisals on purchases are almost always the contract price. One must simply accept that this is the way the world works and live with it.

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  • Caitlin Worrell
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    Investor · Atlanta, GA · Member since 2016 · 17 posts · 3 votes
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    @Jeremy Pace Thanks for your ideas! I think one of the main issues is the limited amount of multifamily inventory in our neighborhood. The comps are both a little far and a bit stale. I am trying to understand if we have any options (e.g. high ROI improvements, diligent documentation/justification, timing the appraisal based on data) to achieve a favorable outcome.

    Subject: $550,000, 2,518 sqft, good cond (interior street)

    Comp 1: $547,000, 2,346 sqft, good cond, 5 months old, 0.79 miles (busy street)

    Comp 2: $470,000, 2,376 sqft, ave cond, 5 months old, 0.63 miles (busy street)

    Comp 3: $675,000, 3,579 sqft, good cond, 7 months old, 2.0 miles

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  • Caitlin Worrell
    OP
    Investor · Atlanta, GA · Member since 2016 · 17 posts · 3 votes
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    @Mark VejnarThanks for outlining those three appraisal methods! I will look into them more. I am not so much enraged as curious to understand the process. I would like to avoid paying for an appraisal only to miss the mark. Rental values in Atlanta are quite healthy at the moment, so we cannot complain about that!

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  • Caitlin Worrell
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    Investor · Atlanta, GA · Member since 2016 · 17 posts · 3 votes
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    @Russell Brazil Thanks. It is very curious that the appraisal always seems to come back at exactly the contract price. I am trying to better understand the methodology and analytics used by the appraisers to avoid unfavorable outcomes. I assumed that the market value would be at least the amount we are actively commanding for rent. It seems like a basic economic concept, the value of something is what people are willing to pay for it.

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  • Mark Vejnar
    Investor · Simpsonville, SC · Member since 2013 · 184 posts · 71 votes
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    @Caitlin Worrell

    You do have options.  

    I've heard of people appealing with their lender - have you tried this?

    If the bank gives clearance you can discuss the report with the appraiser. 

    You can find a member of the appraisal institute and ask for a review of the appraisal. 

    You can prepare for a new appraisal by looking at appraiser-selected comps - some appraisers will do a comprehensive search for comparables, and then discuss them with you. 

    You can order your own appraisal. 

    I know it's infuriating. All the new guidelines have more than doubled appraisers' cost of doing business while simultaneously reducing fees. They have to avoid any hint that a buyer, seller, lender, owner or any other party had an influence on their opinion of value. Then they have to field calls all day, write responses, and new reports. It's pretty typical for appraisers to work 12-18 hour days. I did. Maybe your appraiser is overwhelmed and made a mistake.  

    Talk to your bank about options. Appeal if you can. Maybe have an attorney review the appraisal if you feel you've been damaged - appraisers do carry E&O insurance. Either way the market seems like it's accelerating like in 2004-2006, so maybe just apply again.

    Good luck!

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  • Anna Watkins
    Investor · Atlanta, GA · Member since 2014 · 389 posts · 250 votes
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    Yes, you can appeal/contest an appraisal, but I'm told it could be lengthy.  The appraisers are extremely conservative these days, since they really got reputations burned in the days when their estimates backed up out of whack or fraudulent mortgages.  I had a recent appraisal for a refi that was really disappointing, but I've been looking and looking and honestly, in my area the sales comps (and there aren't many) don't support higher.

    The market rent is a middling value of all the rents in the area -- if yours is on the high side of the range, they don't know why -- is it way better than other units, was it grandfathered in before a rent drop, are you renting to a group that's willing to pay higher because individually they each pay much less???  So they go with a comfortable average-ish number.

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
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    As mentioned by a few others  appraisals will be on the conservative side.

    There is also going to be a distinct difference between a appraiser representing you and one representing the bank. Bank appraisers will always be the most conservative in protecting the bank.

    Keep in mind appraisals are drawn primarily from averages. Your property does not set the value it is only one of many averaged to obtain a final appraisal number. 

    If your rent is $1600 and 9 other similar properties are $1400 your appraiser will place the rent value at $1420.

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  • Caitlin Worrell
    OP
    Investor · Atlanta, GA · Member since 2016 · 17 posts · 3 votes
    10y

    @Anna Watkins I feel your pain regarding a disappointing refinance! I did have a tough time pulling appropriate comps, most were stale and distant. Partially, I think this is due to the neighborhood which comprises mostly SFRs.

    Based on my research, we are around average, maybe even a bit below average, in terms of rent. When I look at two bedrooms in my zip code on rentometer.com, the average 2-bedroom is $1,895 with a range of $1,310-2,480. In that case, $1,600 seems like is should be supported by the evidence base.

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