We had an appraisal come in $40,000 under contract a few weeks ago – and both the buyers and sellers were furious… solely because they did not understand appraisal guidelines.
The contract price was $750,0000, the house was a very cute bungalow in very hot market with excellent curb appeal, and there were multiple offers in that price range – so the “market value” was clearly in the $750,000 range (if that house was put back on the market, it would sell for $750,000 again and again in this market).
The problem was this: there was not a single comparable sale in the clearly defined neighborhood that sold for over $700,000.
And – if there weren’t agents with cool heads involved in the transaction – the deal would have died!
The buyer and seller were both very upset – and they did not want to listen to us; they considered us partially liable for the problem because we ordered the appraisal and they thought we were just being defensive and self-interested.
The appraiser came in as high as she possibly could, given the constraints of hard and fast appraisal guidelines, despite the fact that so many buyers were willing to pay so much more than the appraised value (which is why this is another perfect example of where “appraised values” don’t equal “market values”).
Here are the issues: The property is an 1100 SF bungalow in a small neighborhood surrounded by freeways. The sellers were focused on comparable sales that were much larger than the subject and/or outside the neighborhood, and they also insisted that the appraiser simply make massive upward adjustments to the comparable sales in the immediate area. So, like always, they insisted our appraiser was just really dumb 😊 (I know the appraiser, and she’s just short of brilliant – so yes, this is me defending appraisers again).
Here are the guidelines that constrained our appraiser:
Size: Comparable sales need to be within 20% of the size of the subject property, and the only comparable sales in the area that were even close to $750,000 were 40%, or more, larger.
Location: Comparable sales need to be within a mile of the subject in urban/suburban areas and within the same barriers that border the neighborhood (in this case, it was clearly two major freeways; across one freeway was an inferior neighborhood, and across the other was a vastly superior neighborhood).
Bracketing: This is the guideline that really confuses people – the appraised value must be “bracketed” by the sales prices of comparable sales that meet all of the other guidelines, meaning at least one comparable sale must exceed the appraised value. So, the appraiser can’t simply appraise a property for $50,000 more than all of the other comparable sales in the area by making upward adjustments. Note too that our appraiser still came in slightly over the highest comp by going to bat for us and playing games with some larger and slightly too distant comps to provide the bracketing we needed.
SIDEBAR: I encourage readers to review this blog in which I set out most of the basic guidelines appraisers have to follow: Comparable Sales Appraisers Can’t Use.
So, What Happened With the Above Transaction?
The sellers refused to budge on the price because they knew they could put the house back on the market and instantly re-sell the home to one of the many other potential buyers willing to pay $750,000 still (the market is in the “East Bay” region of the SF Bay Area where there are large numbers of young buyers, flush with stock option cash).
So, we explained the above appraisal guideline constraints to the agents, and they in turn explained them to the buyers and sellers, who both said…”oh, I get it now…” We then adjusted the transaction from an 80% LTV structure to an 85% LTV structure, leaving the buyer with enough cash to make up the appraisal shortfall. And everyone lived happily ever after (really, they did).
So, this is me defending agents again too: calm, rational, and professional agents, who understood the above issues well, saved this transaction.
