The appraisal business seems very odd to me.
You put a contract on a house, the seller counters, then you both end up agreeing on a price - you get the inspection and then comes the appraisal you dish out $350 for.
The mortgage company you have picked provides an appraiser that takes a whole bunch of measurements and then assembles a boilerplate document within an hour or so.
Here comes the weird part - as opposed to making an independent assessment (which is, after all, their “expertise”) the appraiser uses the number from the agreed on price on the contract as part of his or her calculations. Does that seem odd to you?
From the houses that I have purchased in the past the appraisal “magically” comes out right at the contract price. The mortgage company wants the business and does not want to ruin a deal by appraising the subject property below the contract price. The deal would pretty much stop if the buyer couldn’t get a loan to cover the full price of the house.
So what appraisers do is find 3 “comps” that will get them to that contract number. Finding the right 3 houses can be a very creative art form.
Over time, the property values increase to insane levels, because no one is telling the buyers that the house they want is over-priced. Consider, for example, the recent increase in forclosures.
So how does this relate to rentals? Simple - as mortgage prices increase, so do rental prices.
I think appraisers should go into the process without knowing the contract price - I bet if this happened, buyers would renegotiate the sales price down when the appraisal comes in too low for them to get a loan and make the real estate market more stable.
Related Articles
7 users responded in this post
I think that the offer price on the house *is* a viable data point in helping determine the value of a home.
But it’s just that — one data point.
The definition of “market price” is what a ready, willing and able buyer is willing to pay. If someone has submitted an offer, and it has been accepted, then that contract price is what the “market” has determined the home to be worth.
That being said, I do see your point. Disclosing the contract price can obviously influence the appraiser. And it is uncanny how often the appraisal comes out spot-on with the contract price.
But, if *good* comps support it, then so be it. Trouble lies in how far the appraiser has to stretch the definition of a “good comp”.
Jay thanks for the comment.
I guess my question is what is the relationship between the loan officer and the appraiser?
I gotta think that the loan officer is going to keep using a person who brings them the number they want to see and they don’t use someone that constantly comes up short of the contract price.
Dave -
The reason that appraisers need [indeed are REQUIRED by the Uniform Standards of Professional Appraisal Practice (USPAP)] to review contracts is NOT to cheat their client out analysis by using the contract as a “crib sheet” for the Market Value “answer”.
Instead, contracts can can sometimes help reveal bogus “flip” sales and inflated contract prices.
Heightened awareness of the potential Mortgage Fraud issue has caused secondary market investors to look more closely at these areas of an appraisal and to reject those that are weak in reporting and analysis.
“Analysis” of the contract involves :
** reading the contract for unusual terms, concessions,
** allowances for repairs,
** included personal property,
** payment of special assessments,
above-typical commission fees,
and so on, and then analyzing their effect on market value.
There was a recent article in the AppraisalScoop.com blog [ http://tinyurl.com/32cf84 titled: “Sales Contracts - You’re the “Appraiser”, Why should you NEED the contact?” Here’s an excerpt:
Do you think that the appraiser can’t find out what the sales price is without viewing the contract?
** Are you aware of the laws that mandate appraisers review contracts?
** Don’t you understand that appraisers need to know who the parties are?
** Do you understand the possible “valuation precision” consequences when operating in a blind-sale scenario?
BUT TO THE RENTAL ISSUE . . . .
You said: “So how does this relate to rentals? Simple - as mortgage prices increase, so do rental prices.”
I’m not sure what a “mortgage price” is . . .but I’m guessing you’re talking about “market price” or the price paid for a property.
I disagree that rental prices and inflated market prices have the “connection” that you’re suggesting.
Renters compare “value” just as buyers do. If they’re looking to rent an apartment or house they don’t care what MY purchase price was.
If I’ve over-paid (higher mortgage) for my property, it does not follow that renter will automatically now over pay for rent!
I can TRY to ask for more rental funds . . . but ultimately the market (supply & demand) will determine the proper rental level . . .NOT the purchase price or appraised value.
Brian J. Davis
http://www.AppraisalScoop.com
The appraiser is required to look at the Purchase Agreement and therefore must see the contract price. I’m an appraiser and there have been times when the appraised price of a property is higher or lower than the contract price - so be it. A good appraiser searches for the truth not value.
I know when a home is going to be an investment, appraisers in the Denver area have a hard time finding “comps” so they call property managers looking for them. Unlike some areas, Denver doesn’t list homes for lease as a “standard of practice” as in other areas and with the NexGen for Metrolist, I don’t see it changing. This makes it very difficult for an appraiser and helps in the need for good and easy to find vacancy/market studies.
[...] The Home Rental Blog on RentVine tackles the topic of home rental prices and their relation to home appraisals. The blogger’s premise: “As mortgage prices increase, so do rental prices.” On the surface, this seems logical–home prices drive the rental market. But according to the post, the home appraisal is not an accurate rendering of the market value of the house. “As opposed to making an independent assessment (which is, after all, their ‘expertise’),” the blog states, “the appraiser uses the number from the agreed on price on the contract as part of his or her calculations.” Which makes the whole thing a little bit less than analytical. The home appraisal is a bit of a conundrum. One thing you have to be conscious of is — who does the appraiser work for? The buyer’s loan officer, that’s who. So it’s in the best interests of the loan officer and thus the home appraiser not to kill the deal with a value figure that’s lower than the buyer’s offer, because that means the buyer’s going to back out unless they can lower their offer. All of which gets back to the issue of home rental prices. If these unrealistic home appraisal figures are artificially driving up the price of homes, then they are also pushing rental prices upward. Not so, says Brian J. Davis of AppraisalScoop, in responding to the blog post. “I disagree that rental prices and inflated market prices have the ‘connection’ that you’re suggesting,” he writes. “Renters compare ‘value’ just as buyers do. If they’re looking to rent an apartment or house they don’t care what MY purchase price was. If I’ve over-paid (higher mortgage) for my property, it does not follow that renter will automatically now over pay for rent!” I tend to agree with this. A renter can shop quicker for a rental, they can look at more places, than a home buyer. The process is much more streamlined. They can look at 3 houses in an hour to find out prices, while a home buyer has to put in a bid first and hire a home appraiser for $350 to determine the “value” of a home. In some ways, home rental prices are a much more reliable index than home sale prices. Find more articles tagged with: home appraisal, home rental, home sales prices, rental prices, renters resources, renters tips Print This Post | Bookmark to | Permalink | filed under Uncategorized [...]
[...] and how they affect the price of rent. It seems, as I found out while writing this, that even real-estate experts, not even home appraisers themselves, can tell you exactly how the appraised value of a house is determined. It goes something like [...]