This is b/c aggressive buyers in multiple bid situations frequently offer to pay far more for a property than what closed comparable sales can support in an appraisal.
If buyers have ample cash, low appraisals are often not an issue, as buyers can simply bring in cash to cover shortfalls.
If cash is tight, however, a low appraisal can kill a deal (another statement from “Captain Obvious” 😊).
We obviously want appraisals to support the contract price as much as anyone.
This is b/c we want to support our clients and b/c we don’t get paid a penny unless the transaction closes (just like our agent partners).
In addition, we have far more time and money invested in every transaction than most people realize, so we fight very aggressively to ensure every transaction closes.
Our appraisers often go to bat for us and try to bring in appraisals as high as possible while still complying with appraisal guidelines.
The problem is that such appraisals often invite reviews by underwriters b/c the values are much higher than the automated value estimates the underwriters use or b/c the comparable sales appear to be too weak.
And reviewers often cut values in these situations.
On the jumbo mortgage front, the situation is even tougher b/c most jumbo investors call for some sort of desk review (as opposed to a full “in-the-field” review) no matter what.
When appraised values are cut, we of course try to rebut the conclusion to get the value restored.
We in fact have a full-time, fully licensed appraisal manager who specializes in this, and one of the first things she does is request comparable sales from both selling and listing agents.
And more often than not, she is given comparable sales that she is unable to use b/c they are so far outside of appraisal guidelines.
Or worse – she is often given comparable sales that support a lower value b/c of the adjustments that are required for larger dwelling size, larger lot size, better view, less traffic, etc.
This is especially a problem for smaller Bay Area properties (1,200 to 1,600 square feet) that sell in the $1.5 million to $2 million range.
Agents often send us comparable sales that are in the 2,000 to 4,000 square foot range that appraisers cannot use b/c the properties are not actually “comparable,” given their far larger size.
All this is to say that we and our appraisers will do everything we can to support a contract price, but our hands are tied by hard and fast appraisal guidelines that every lender must abide by.
Below are some of those guidelines that I have shared on numerous occasions in previous blogs.
I thought it was high time to share these guidelines again – given how hot the market is and how often we are likely to face appraisal issues.
We all need to keep these guidelines in mind when sharing or suggesting comparable sales.
BASIC GUIDELINES FOR COMPARABLE SALES:
A. SIZE
Comps should ideally be within 20% of the size of the subject property (unless no other comps are available). For example, appraisers usually cannot use a 1,300 sq ft comp for a 1,000 sq ft subject property. Likewise, appraisers cannot use a 700 sq ft comp for a 1,000 sq ft property. Appraisers also cannot simply employ a “price per square foot analysis” like some agents and homeowners often do; appraisers are required to correlate to similar sized homes.
B. DISTANCE
Comps should ideally be within one mile of the subject property, and not over any major barriers like a freeway, a river or railroad tracks.
C. SAME TOWN/CITY
Comps need to be in the same city as the subject property in most cases, even if a comp in another city is less than a block from the subject property.
D. CLOSED
The strongest indicators of current value are those comps which have closed within the past 90 days. Pending sales and listings are only used on the appraisal report to show what the current market is doing; appraisers do not consider these comps in their final opinion of value.
E. LOT SIZE
The appraiser must also consider the lot size and lot utility in the valuation. If the subject and all comps have flat usable lots, the appraiser will adjust for large variances in lot size. In areas where lots are sloped, appraisers will estimate a lot’s usable area or “utility” and adjust accordingly. The important thing to remember is that a 40,000 square foot sloped lot will often not have any more value than a 10,000 square foot flat lot.
F. ADVERSE INFLUENCES
If the subject is on a busy street or abuts a school, freeway, railroad, industrial area, cemetery, etc., the appraiser must include at least one comparable in the report with a similar location influence. This is necessary to determine if an adjustment is required for the adverse influence.
G. BRACKETING COMPS
Valid comps need to “bracket” the appraised value. Hence, at least one comp needs to be priced higher than the appraised value, and one should be priced lower. Additionally, the appraiser must “bracket” each amenity of the home with the comps. For example, the appraiser must include homes that are larger and smaller than the subject to “bracket” the size of the home.
H. CONDO COMPS
The appraiser should ideally include comps from inside and outside of the complex. If either are missing, underwriters often call for appraisal reviews.
I. VIEW
If the subject enjoys an unobstructed view of an ocean or a lake, for example, the appraiser must show the value of that view by using some comparables with a similar view and some with no view. Appraisers generally should not use “view comps” to support the value of a property with no view. This is also a good example of why appraisers do not use the “price per square foot” analysis. If two homes are identical and one has an ocean-view and the other does not, the one with the view will skew the analysis.
J. CLOSED DATE
Comparable sales must have closed prior to the inspection date of an appraisal. Appraisers cannot use comps that close after the inspection date.
Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167
