How do home appraisals work?

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Laing_Lies_IHB

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Can you people please enlighten me on how home appraisals work?

Are appraisers basically told by the lender what they should appraise the home for - and they do so?

Who regulates appraisers, and what happens if a home is appraised for a value that is less than what the selling price is for?
 
Hot topic!

(Standing back.)

1. Comparing subject to recent, similar sales.

2. Not supposed to! (Although it can be inferred from the Sales Contract.)

3. The states. Buyer brings in the difference, or renegotiates with the seller, or a new appraisal is ordered!
 
Just wondering how several homes listed on the same street (or within the same building) can have such a wide range of prices - and be appraised for such.
 
They shouldn't be too far apart it they are of comparable size and features.

"Adjustments" are used for features that are dissimilar, i.e., difference in bed or bath counts (and a host of less important items).

"Comps" (comparable sales) should be within the same six month timeframe as well.

Appraisers find comps best-matched to the "subject". The subject should be "bracketed" by the comps used (sandwiched between a higher,and lower, comp).
 
Caveat:

The "Comparable Sales Approach" is the methodology used for homes today.

The "Income Approach" is also used for investment properties.

A third, the "Replacement Cost Approach" is what it sounds like.

IR makes a compelling argument that only the Income Approach is valid.

Ideally, it would be great if all three arrived at the same conclusion.

But that's not how it works today. Banks only use the Comparable Sales Approach.
 
It just all seems so random to me. Like the seller would get their appraiser to say one price, then the buyer could get another appraiser to say a different price.

Also, we've all seen examples of homes on the same street - perhaps one has to sell due to risk of foreclosure and they're listing it for several hundreds of thousands below their neighbors.

Or, I believe it was from last week... the post on the blog about "who can undercut the builder" in regards to selling price. I think it was talking about how many units were being relisted in Watermarke and how the prices were quite varied. One was listed by the bank and was even undercutting the builder's reduced price.

Do appraisals work differently when it comes to foreclosures?
 
Or....I know that the home may not get appraised until the time of sale....but how could someone list their home at one price, thinking it should sell for that price. Then, lower it several months later.

I mean, if comps are supposed to be used when determining the value of the home....then it's almost like the home should be appraised before it's even initially listed?
 
That's why comps should bracket the subject.

Banks don't want to see your home being the highest.

Additionally, even if your property is bracketed, if an underwriter sees that there are a slew of comps below yours, they will ask the appraiser to go back and justify not using them.

If he can't, he will have to cut it back.
 
Appraisals are worthless right now. When we bought our house the appraiser was some kid who spent very little time and just appraised it at the same value that we payed for it. In the report he compared it to homes not even in the same neighborhood that had sold ages ago that were nothing like the home we bought. I guess he picked them because they had the same doller per square foot sale price. One was a total rehab whereas our purchase was model perfect with upgrades. Our exact model sold twice in the past year but he didn't include either of those sales as comps.

With each home selling for less than it's prior comp, I guess it is hard to get an accurate value these days so they just make the numbers work.

In other news, you can buy a model perfect, totally upgraded home now for the same $/sq. ft value that a total fixer went for last year.
 
IN -

That's why I'm so confused. It just seems like the appraiser will just value the home at whatever the requested loan amount is.

It's almost like statistics ... you can play with the numbers to make almost any argument valid.
 
There really needs to be a review of the appraisal standards by the industry board. I guess the proper guideline is to use a balance of the 3 methods, but we all know this isn't the case. I wouldn't go so far as to say that Income Approach is the only valid method, as I believe market value is an important facet of any investable asset. I do think Replacement Cost Approach should be done away with. But a combination of the Income & Market approaches makes sense. Anyone want to work on that for their Ph.D thesis?
 
Gepetoh:

What's the income approach? Can you explain that so that someone with only very little knowledge about appraisals, ie. myself, would understand?

Thanks in advance!
 
Laing_Lies,

It is a cashflow analysis. Basically, it is an estimation of the maximum amount an investor would be able to pay and still have more money coming in each month than goes out.
 
I've heard they only need two comps and can go with that. I also spoke with an appraiser and asked if they found a few properties in the area most similar pricing but one foreclosure say $200K, would they average out the price? He said no he'd probably just throw out the foreclosure because its an abnormality. I wonder how this will pan out as foreclosures become more common and less the abnormality??
 
Boyz,

That's correct - a single, or even a few, foreclosures can be ignored.

However, once they reach a critical mass, they cannot.

Two comps are acceptable to some lenders, however, another problem may be created.

That is: the property may be deemed to be "unique".

You do not want your property to be classified as one of these, because you could not only be subject to a different set of lending guidelines, but also a penalty to your pricing.

Lenders like sameness - and predictability.
 
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