The quote in the subject line is from our Appraisal Manager, as we have seen an onslaught of low appraisals recently.
The primary reason is that the market is heating up in some areas – so offers are coming in that are higher than all of the closed comparable sales in the immediate neighborhood.
This is ironic because: (1) media headlines are screaming that the market is declining; and (2) it is often EASIER to appraise homes at value when the market is declining.
Appraisers Cannot Correlate to or Consider Offers (Closed Comps Only)
This is probably the biggest source of confusion amongst agents. Invariably, when appraisals come in low, the agents tell us that there were multiple offers above the appraised value. But, unfortunately, appraisers cannot correlate to the offers; they can only correlate to closed comparable sales within the immediate neighborhood. Appraisers must adhere to hard and fast appraisal guidelines (discussed below).
Appraised Value Is Not Market Value
I often beat this dead horse, including here: When “Appraised” Value Is NOT Market Value. As mentioned above, appraisers must correlate to closed comparable sales only. So, when all of the offers in a multiple offer situation come in higher than all of the closed comparable sales, it is almost inevitable that the appraisal will come in UNDER “market value” – as long as we define “market value” as the price multiple buyers are willing to pay in a free and open market.
So yes, when agents tell me a property is clearly “worth” much more than the appraised value, the economist in me always heartily agrees.
That does not, unfortunately, give us any ammunition to increase an appraised value, as appraisers are constrained by hard and fast appraisal guidelines.
In any case, it is these multiple offer situations that are fostering most of our low appraisal issues.
Appraisal Guidelines
When appraisals come in low, agents almost always send us comps appraisers are simply not allowed to use – because the comps do not comply with appraisal guidelines. The comps are often way too big or way outside of the allowable neighborhood.
From a market perspective, the agents’ comps are very logical – as they and their clients can and do consider the comps when they are making offers. But again, appraisers can’t use those comps because they must adhere to appraisal guidelines.
I strongly encourage agents to review this blog again so they will know when it is likely that an appraisal will come in low: Comparable Sales Appraisers Can and CAN’T Use.
These guidelines include: (1) size constraints – comps need to be within 20% of the same size; (2) distance constraints – comps need to be within one mile and not over major barriers like a freeway; and (3) closing date constraints – comps must be closed prior to the inspection and within the last 90 days in most cases. Location (busy street, by a school, etc.) and view amenities are additional factors that appraisers must account for.
Appraisers Can’t Ignore Inconvenient Comps
Lenders review every single appraisal – either manually or with automation software (discussed below). And that is why appraisers can never simply ignore comps in the area that do not support value. Underwriters will always see them.
And – if underwriters do see missed comps, they will ask the appraiser to explain them or they will call for an appraisal review. I discuss this in this blog: Appraisers Can’t Ignore “Bad” Comparable Sales; Agents Shouldn’t Either.
If agents are aware of low comps that can be “explained,” they should bring those comps to the appraiser’s attention along with the explanation, e.g. entire house smells like cat urine (actual explanation an appraiser once used).
Danger: High CU Scores and Appraisal Reviews
I used to work for an attorney who also did appraisal reviews. And – if he thought an appraiser was trying to push a value way too high by ignoring comps, using the wrong comps, or making illogical adjustments – he would slice the appraisal to ribbons. He was very pro-appraiser too, so he would give them much leeway. He would, however, lose all patience if the value push was too obvious.
And this is how ALL review appraisers are. And this is why we try to avoid appraisal reviews if at all possible – when we are trying to support a value that is higher than the prevailing neighborhood comps.
So even if we could encourage a “friendly” appraiser to ignore appraisal guidelines, it would do no good – as it would just result in an appraisal review that would likely result in a value cut and an even lower value than what we had hoped for.
The other problem is a high CU score.
CU stands for “collateral underwriter,” and it is merely the automated appraisal analysis software that Fannie and Freddie require every lender to use. The scores range from 1 to 5, and anything over 2.5 is considered suspect. Scores over 3 or 4, depending on the lender or loan product, pretty much render the appraisal unusable (without a review or major changes).
If appraisers ignore comps in the immediate area or skirt appraisal guidelines, the CU score will come in too high…every time – often requiring value cuts, the addition of missed comps, or an appraisal review.
Markets Not Declining
We have an Austin, Texas appraisal that just came in a whopping 10% over the contract price. One of the reasons is that the market is actually declining a bit there (just not as much as the media would have you believe). In any case, this makes it easier for appraisals to come in high because closed comps often exceed the current market value.
Many other markets (like various California Bay Area pockets) seem to be heating up again, in response to the season and/or falling rates. As a result, we are seeing multiple offers that exceed prevailing market comp prices.
The declining market perception though makes it even harder for appraisers to correlate to the higher end of the range of values, as underwriters are not getting the “hot market” memos.
What Should Agents Do?
I strongly encourage agents to review the appraisal guidelines discussed above.
If there are insufficient comps that both meet guidelines and support the offering price, agents should prepare clients bidding in hot markets for the strong likelihood of a low appraisal.
Agents should also explain that “market value often does not equal appraised value,” so buyers do not think they are over-bidding.
If buyers are aware ahead of time, they will not be caught off guard by a low appraisal and lenders can structure financing around the potential low appraisal.
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