Appraisal Adjustments - only $5k per bedroom???

Question

I'm currently in the process of refinancing a 2 family house which has two 4 bedroom 3 bath units in it.  There are a shortage of multifamily comps in my area and the comps that were used are all 2 bedroom 1 bath two family properties.  The appraiser has decided to use the unit value approach.  We can't use income approach as part of the income is Short Term Vacation rental and the appraiser / bank won't accept that.  With that said the properties typically rent for $800 a bedroom a month, so the bedroom count has a direct impact on the value since in off season its college rentals.

The issue I'm running into is the for the additional 4 bedrooms the appraiser is only giving me $20,000 in adjustments for, though the average per bedroom price of the comps is $175k.

Has anyone had any success in making a case the additional bedrooms should be valued at more than $5000 a bedroom?

For some additional content the property is worth somewhere around $950k - $1.1m.

Thank you for your thoughts and advice.

Chris Mason · Answer

Diminishing marginal returns apply after the 3rd bedroom. 3 bedrooms is the sweet spot, as far as appraisers are concerned, at least in my market. People don't make as many babies as they used to, so those folks view the extra rooms as just extra stuff to clean, they aren't going to AirBnB the home to potential child molesters where their 3 year old and 1 year old live. I have clients buying a 3br SFR for $650k, and a 7br SFR (!!!) for only $850k, in the exact same neighborhood.

Account Closed · Answer

I was a mortgage appraiser for 14 years. Some interesting comments made so far, most are...

The first thing you need to realize is the bank orders the appraisal and it is their appraisal for their own purpose, not yours. I bring this up because you don't understand what your looking at and what it all means and how it all works. Few people do, including the damn lenders (underwriters and loan officers) all too often.

The first question I ask is if the appraisal report was done on a FNMA form. If so, no matter what your lender is telling you otherwise, the appraisal is going to be done to FNMA standards, unless the appraiser is an idiot (and that happens all too often too).

And just because there are somewhere around 10 different ways to approach value on the 1025 Small Income Report, the appraiser only uses one, because FNMA only recognizes and loans according to one - the reconciliation of the sales comparison approach. And there is only one piece of credible data within the sales comparison approach, the actual sale prices of the comparable properties.

The problem your appraiser has, and now you have, is a lack of data. Frankly, that makes the appraisal report questionable right there, and if you wanted to challenge it or try to have the lender hire another appraiser, that would be the path I would suggest. I forget off-hand which one it is, but in the fine print of the appraisal report there is a certification that states the appraiser had adequate data to develop a credible opinion of value - clearly they don't and should have withdrawn from the assignment.

They don't have enough comps. Even if they were going to place weight on the price per bedroom approach, they have no basis for that approach, or the adjustments they have made - or at the very least (and nicest I can be about this) you are not seeing that data in the report - they might have that somewhere else in their work file or another work file.

At the end of the day and as stated earlier the relevant data used in small income mortgage appraisals is the actual sale price of the comparable properties. This is THE ONLY data that is not subjective and can be used as a credible basis for anything. But, just because I said that and it is in fact true, does not mean the appraiser did it that way or the bank understands that either!!! Mortgage appraisals are a shit-show and that's one of the big reasons I walked away. All of that needs to be taken up with FNMA, the true dictator of appraisals and the appraisal industry. And you thought appraisers were an independent third party didn't you!!! Not with mortgage appraisals. USPAP aint helping either - but that can be traced back to FNMA too.

Sorry all I have is more of a rant and not more helpful stuff. Lender rules/general practices are stopping the appraiser from going back in time or out of market to find and use data for analysis and report support. However, that is exactly what needs to be done. And in any event, because multi-family data is found in less quantity and quality than would be ideal (far from it in your case) an appraisal of such properties will always be weak.

Here is my advice for the future - ignore almost everything in the appraisal with exception to two things. First consider if the properties used as comps are comps and second the actual sale price of those comps - the final opinion of value ought to be supported with those two things. The sales grid with adjustments is nonsense and lacks any credible support - no matter what garbage the appraiser has said about any of it in their report.

I'm too honest and too good at math to be a mortgage appraiser. Need to lack one or the other or both to succeed in that industry.

Good luck.

Russell Brazil · Answer

Renting by the room does not factor into the appraisal. Comparable sales, and market rent for the entire property that is recorded in the MLS. We double our rents by renting by the room....zero affect on appraisal.

Account Closed · Answer

Yea...I appreciate that you appreciate what I wrote, but you're not listening to it - lol.

The types of things you are thinking about and talking about are quite valid and you are not alone, but the reason I say that is not why you think it is. Because that appraisal report is designed by the lender, for the lender, and not intended for you whatsoever, despite the fact you paid for it and have a copy of it in your possession, you really don't know what you're looking at or how to really interpret what it says. I am not at all trying to be insulting or condescending, what I'm saying is it's not your report, it wasn't written for you, and therefore you struggle to understand it.

In retrospect, the two posts I made in this thread are also very likely confusing and misunderstood by most people. Chris, who is a lender, and a smart one at that, gets what I wrote. He reads mortgage appraisals all day long, every day, and has intimate knowledge of the lending industry and mortgage appraisals. Mortgage appraisal reports are written for people like him, and so very often certain things go unsaid because it is expected the intended user of the report (the lender, not the borrower) understands many things without needing explanation. Such as how adjustments in the sales grid really have zero meaning or relevance in the grand scheme of things.

The appraisal industry needs a lot of help. There is too much confusion and ignorance among the general public when it comes to what appraisals are and much more importantly, what they are not. I tried very hard to influence my industry through my peers and regulatory institutions, but the truth is the whole thing is too disorganized and fragmented and political and greedy - I gave up and walked away.

I don't know what else to say. Sorry I went on and on and was little help.

I'll leave you with this. Stop looking at the details - I mean it, knock it off. The best way to judge if you got a fair appraisal is to do two simple things. First look at the 3 comparable properties that were presented in the sales comparison grid (and the rental grid too I suppose, for a judgement of market rents). Ask yourself a simple question, if you could not buy the property you own, are the 3 properties reflective of a comparable substitute, GENERALLY SPEAKING (I'm all caps because you seem like the sort of person that likes to get bogged down on small details). If the answer is yes, then good. If the answer is no, stop right there, that appraisal is not supported with relevant data. If the answer is yes, then look at the actual sale prices, NOT the adjusted sale prices at the bottom of the grid, the actual sale prices are reported at the top of the grid. The opinion of value the appraiser made ought to be no more than the highest and no less than the lowest of the three values of the three sales. If that is not the case, the appraiser has written pages of BS to explain why, and there is a 99.99% chance they can't prove any of it. Those actual sale prices, NOT the adjusted sale prices, are the ONLY factual market data in the entire report - everything else is not much better than an educated guess and so therefore, that factual data is the only thing that counts. No, it doesn't really help fine-tune the value down to a single price does it??? LOL. Sigh. I gotta leave this one alone. I also gotta stop jumping in a thread every time someone gets annoyed with an appraisal - lol.

Good luck.

Account Closed · Answer

Yea...you've come really close to hitting it all dead nuts. I really appreciate you saying all that, considering you are a lender. The HVCC and Dodd-Frank and AMC stuff is really an important part of the story.

While the 4% increase works on paper, it does not account for what we call scope creep. Scope creep is being asked to do more for the same amount of money. When I started, we could get through 2-4 appraisals in a single day, start to finish (with a small amount of office support). Today, an appraiser is lucky to get a single report done each day. Anyone doing more than that is either one of the rare few that work in a ridiculously easy market or, they are pumping out garbage as fast as they can. Most markets in the US are the opposite of easy. My average report was something like 40 pages of nonsense and 1 page of meat. Go run the math on that and get back to me - lol.

You touched on how value is influenced. Good grief it's a fucking mess. On the one hand it is entirely the appraisers fault, and on the other hand it's not their fault one bit. I aint going into it - it requires a much longer novel to explain the diabolical environment that has been designed and implemented and all the people who are complicit without their own knowledge. Yea, you fuckers know who you are and what I'm talking about, even if the rest of us are confused (I don't mean you Chris - I'm talking to invisible people). And, I know that poking a bear in the face is bad for your health. Call me crazy. Works for me. That's what people do when they want the truth silenced.

Anywhos...news you can use. If you are part of a sale, don't worry, the appraiser has the contract in hand - the value will be there unless the contract price is nuts. And in that vein, if the appraiser comes in lower than the contract price, you'd be a damn fool to not recognize your paying too much and get mad at the appraiser - geez. I suppose there are some exceptions to what I just said. As far as a refinance, when that appraiser comes into your house, walk right up the them and tell them what you think the house is worth and how much you need the appraisal to say to get your loan - lol. Aint nothing stopping anyone from putting that in their head - it's up to the appraiser to be independent and unbiased - but the real trick to what I'm saying is that all appraisals have wiggle room and if the appraiser knows what you need and has the wiggle room to hit it, they probably will unless they have a damn good reason not to. BECAUSE, here is one more piece of ugly truth, while loan officers are forbidden from directly pressuring appraisers, there is nothing stopping the lender from going to the next appraiser when one of them comes in low too often AND that's exactly what happens all too often, right after the lender attempts to punish and mold the appraiser with a reconsideration of value request which by the way Chris, is illegal. Then again, laws need teeth to be relevant don't they.

Anywhos...on a personal note, I think your one of the good guys and I always enjoy your posts. You always provide great insight to the lending world and what people can do to help themselves get loans. And, after I ranted like I did have to say, credit and currency make our world a much better place, no matter some of the shenanigans that go along with it.

Russell Brazil · Answer

Have an agent meet the appraiser. Agents are trained in getting houses to appraise.

Kiwi Mills · Answer

Account Closed Love the info This is my favorite post !   To think I was originally going to pile on and complain how my house is a "townhome" so its valued way under houses with less Bedrooms or Sq. Ft

Learned allot thank you all for the post!

Chris Mason · Answer

Scope creep...

Please comment on if the general contractor who replaced the roof on comp #3 was licensed and insured when they did their work, please include a copy of that license, the insurance, and that general contractor's birth certificate, and please have it back to me by 3 pm, or fire and brimstone will erupt. :P

Yeah it's pretty safe to say that residential appraising is fundamentally broken. Dodd-Frank didn't fix anything, it just broke it in new ways. Something you might not have known, it's not just the LOs doing funky stuff, more and more listing agents are shopping multiple offers by asking the LO what AMC they are using, if the property condition and/or price point are shaky. More than once I have been asked the specific appraisers name during that pre-escrow phone call (contract isn't even ratified at this point, the appraisal order is like 5 steps away), I think we both know what that implies is happening in some cases, for that question to even exist.

Chris Mason · Answer

Lurkers: Remember this post when you, or someone you know, gets the brilliant idea to become a residential appraiser.

I'll give another fun factoid. Older LOs tell me that in the 1990s, a ho-hum SFR vanilla appraisal was around $425. An inflation calculator tells me that in 2020 appraisers should be getting no less than $750 a pop for that same appraisal, if all they were doing was getting pay raises that track with inflation.

But they aren't getting $750 for that ho-hum SFR appraisal. They are getting about $550, and thanks to Dodd-Frank the "appraisal management company" is taking their ~20% cut, and oh look at that we're right back at around $440. Do you want to be in a job where the pay raise after ~3 decades of work is, in total, only about 4%?

But that 4% per 3 decades pay raise is on the per appraisal basis. So what can you do to adjust your own income to reflect inflation, cost of living differences, etc, since the 1990s? Do more appraisal reports, which means doing them FASTER. That is all you can do, churn those puppies out at the speed of light. Or, quit and go do something else for a living.

Appraisals with Realtors involved (purchase transactions) come in consistently higher, in part, because at this stage in the game, wise Realtors know that if they spoon-feed the appraiser the data they need to do their jobs for them, that helps the appraiser get the job done faster, which amounts to the same thing as a bribe (in terms of $ per hour of work, this is "here I'll save you a few hours"), without being a direct monetary bribe or running afoul of the law. When I'm the LO I'm not allowed to talk to the appraiser about value, but the last time I personally refinanced (meaning that for that transaction, I was the "consumer"), the appraisal came in about $5k above what I thought it would (and that is why LOs aren't allowed to talk to appraisers in their capacity as LO, heh).

Mike Cumbie · Answer

Just going off the bedroom question. Often times we do not adjust for a bedroom on a 1-4 family (at least in my market). We use the sq foot calculation. What is the real value difference between a 2,000 sq/ft 3bed/2bath colonial and a 2000 sq/ft 5bed/2 bath colonial, besides smaller bedrooms? Since they can comp to single family (which is why people can get FHA loans etc). From a market perspective does the buyer want 5 small bedrooms or 3 larger bedrooms and more living space?

Appraisal Adjustments - only $5k per bedroom???

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