Wednesday, November 7, 2007

Appraisal Myth

I was reading this article from a few days ago and it reminded me of how subjective appraisals are. To an outsider, the word "appraisal" brings to mind the most objective of reports and occupations. I have the utmost respect for appraisers and I know many and like them all. However, the more I invested, the more it seemed to me that an appraiser could justify just about any price for a home.

Basically, an appraisal lists the amenities of the subject house, and then three other recent comparable sales (comps) in the close vicinity. The house being appraised is given credit or deductions based on how it compares to the other three. So, if the subject property has four bedrooms, but a comp only has three, this would add a certain amount of value to the price. If one of the comps has a larger lot, then money would be deducted for the house being appraised. And so on, and so forth for square footage, bathrooms, number of garages, cul-de-sac location, pool, upgrades, view, etc. Then, at the end, more is written to specifically describe why the house is given the value that it is. Other than that I really don't know how appraisers perform their magic.

We have a few interesting stories about our experiences with appraisers and appraisals. There were at least two occasions when an appraiser did not feel that the price that we were trying to refinance or sell at was justified. Both times we were successful in having the appraisal changed. One time, I was refinancing four of our homes with PHH/AMX. On one of them, the value came in around $20,000 less than I expected. I had a fit and told my loan agent that the comps in the area were higher. She told me to write it up. So I copied the comps that I had, described the home in terms of the added value characteristics, and was successful in bringing up the appraisal to what I felt it was worth.

Another time, we were selling a home that we had recently bought, but never rented out. It had been around four months later and we listed the house for $40,000 more than what we bought it. After six months, it was in escrow and the appraiser was sent out. He was very unhappy that we were trying to sell it for that much more after such a short period of time. Hello! We had a buyer dying to close and move in. My agent and I harangued the poor guy until he relented and gave us the value that was on the sales contract. I remember distinctly that my agent told me that the appraiser said that we were asking him to over inflate the price of the home, which will lead to a market crash one day, and that investors just needed to slow down a bit in order to stabilize the values. Whatever! Just change your appraisal already! Real estate was HOT and there was no way a crash would be occurring any time soon. That was 2005.

Then there are the appraisals that we paid for ourselves. We found an appraiser out here who we liked to work with because they had a reasonable turnaround time (many companies wouldn't give a non-lender the time of day). We hired this company to appraise three of our homes because, after speaking to our lender, the tenants were interested in buying them (although none did). I would order the appraisal and say, casually, "It appears that the appraisal should come in at (and I'd name the amount)." I would suggest a value about $10,000 more than I wanted. This way the appraiser would feel that he didn't kowtow to me. I must have been hotter than the market then because, by golly, I was able to guess (read: suggest) the amount of the appraisal before it was completed.

So, as the real estate bubble burst, so did my impression that appraisals were objective, fact-based, incorruptible documents. I guess it's true that nothing is written in stone.