A Low Appraisal is Now a Bad Appraisal

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Dave Towne
Latest posts by Dave Towne (see all)

A Low Appraisal is Now a Bad Appraisal? We Do Not Massage the DataA low appraisal is now a bad appraisal. Well, that’s according to the headline. The article does not stress ‘bad.’

See the article, “A Wild Market Means More Home Appraisals are Coming in Low. Here’s What to do if a Bad Appraisal Threatens Your Deal”, in Money.com.

“We” appraisers are now experiencing the same level of buyer goofiness and panic we encountered in 2006-2008, before everything melted down. Inventories are low, and buyer interest is intense.

In my immediate neighborhood less than a month ago, an older vacant home came up for sale, listed in the MLS. I looked at the home (actually looked in the windows, etc.) and ‘almost’ received the assignment under a fee and turn-time bid, but another appraiser got it. At the time, I did comp research and decided that the contract sale price could not be supported… and frankly, that’s how I would have done the report. I do not “massage the data” just to make agents, MLO’s and lenders grin. The loan was approved (for more than the actual sale price!), and the buyers moved in this past week.

Two days ago, our lovely lady mail carrier deposited a gloating postcard from the listing brokers who told residents living nearby that the home sold for $15K over the list price, with multiple offers received. Yep, they are real proud of that. By the way, that amount by itself resulted in $450 more commission to them, enough for a couple of plane tickets to Cabo, and a few ‘toddies’ while there!

Because we appraisers are often considered villains in the lending process, all we can do is spend extra time researching recent comp sales to find the most appropriate ones, and then do enough analysis to plug in a positive time adjustment to the comps if warranted. I do this on most reports, because that’s what the Excel spreadsheet data tells me.

If you can’t legitimately report a value at the contract sale price, oh well. It’s not really your problem.

Again, buyers are desperate and many use escalation clauses in their home purchase offers to jack up the resulting sale price above what it would be in a ‘normal’ market. Agents are gleeful, singing high praises – through their masks so as to “protect” anyone nearby.

Fun times, again… for those of us who’ve gone through this before – before masks were mandated. (Not really!)

Image credit flickr - Marcus Quigmire
Dave Towne

Dave Towne

AGA, MNAA, Accredited Green Appraiser - Licensed in WA State since 2003. Dave Towne on e-AppraisersDirectory.com

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29 Responses

  1. Avatar Nic says:

    I’ll do my best not to be snarky. A drive by appraisal doesn’t mean you just drive by a house and go home and call it a day. If an appraiser has any integrity whatsoever, he should have gotten out of his car, walked around the home, taken pictures that he can and then hey, guess what, we have these things call telephones. Pick it up and call the home owner, ask them for interior pictures, EA the appraisal and disclose what you didn’t do. Have some integrity to the profession or don’t take the job.

    I had my own experience with this; the appraiser did a ‘drive-by’ and it was literally that (the doorbell caught him slowly pass the front of the house…didn’t even get out). Didn’t call, didn’t want to talk to me. I was embarrassed for my profession. Have some integrity.

    I understand things are hard, that we’re doing the best we can, that doesn’t mean you stop trying.

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    • Avatar michael jones says:

      I get what you are saying after 35 years in the business but a Drive by appraisal is just that. I am not getting paid to walk around the house. I am not getting paid to call the owner and ask them to send me interior photos and I am not getting paid to interview the homeowner and in fact for the 2055 form I am usually instructed to NOT call the owner. To make things even more complicated our (Kentucky) appraisal board says that the appraiser is NOT to use any information provided by the owner that can not be personally verified, as that owner has a financial interest in the transaction. So if the publicly available data says the basement is unfinished then the basement is unfinished regardless of what the property owner says. It is not the appraiser’s fault that the lender ordered the wrong appraisal. So yes, a Drive by appraisal in most cases means exactly that – you drive by, take a couple of photos and then go home and spend 6 hours piecing together all the data you have on the property. I would actually prefer to come inside and discuss the property with the home owner but lenders dont want to pay us to do that because regulatons put in place over the last 10 years no longer require it for the vast majority of transactions.

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      • Avatar nic says:

        You are being paid as a professional; I would not risk my license or my reputation by doing the bare minimum. I’ll give you not getting out of the car. A phone call surely isn’t too much to ask. You very much ARE being paid to provide a reputable service. Unless you want a lawyer coming at you with USPAP in hand you very much should do the bare minimum and at least call the owner. It’s negligent to do otherwise (in my opinion).

        There were a lot of things that the appraiser missed and it became an issue for the bank. All would’ve been avoided with a simple phone call. What happened I don’t know.

        Above aside, I can appreciate an appraiser being in a rock and a hard place, but we’re paid and hired for our professional discretion and judgement.

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      • Baggins Baggins says:

        Notice of a finished basement from the owner is learned information. You can’t ignore that. The assessors records does not always reflect what the building permitting department knows, they don’t always talk and share data like they should. Having assessment reflect something different than the current state of real property is not justification to ignore the current state of the real property. As long as the alteration passes the 3 tests, you should credit that basement based on assumption of learned information, decline the order, or request it be moved to a full interior inspection.

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        • Avatar michael jones says:

          Not to be snarky but it’s not “learned information” unless your client provides you the opportunity to learn it. If the engagement letter says “DO NOT CALL THE OWNER” then I am not calling the owner. Hence my opportunity to learn the fact that the basement has been finished or any other facts about the property that is not publicly available or not observable from the exterior drive-by exists. It may be different in other states but here in KY our appraisal board weighed in on this issue a few years ago as a result of a complaint on a 2055 drive by. They (the KREAB) says that Information provided by the owner must be verified as they have a financial interest in the transaction. That is in USPAP as well.

          What would solve this whole issue is smarter lenders. If they would spend a few minutes discussing the property they are about to take as collateral with the owner, it should be clear what appraisal reporting format is needed.

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    • Avatar Johnny Q says:

      I’m going to have to agree with Michael on this one Nic. An exterior inspection is just that. Personally, if the borrower’s phone number is provided I make that phone call to confirm particulars about the property, any updated that might have been made, HOA info, etc. I can appreciate your dedication but getting out of the car, walking the property, asking the homeowner for photos is a bit too far. You might as well take your measuring device, measure the structure and, since you’re already sort of trespassing, might as well knock on the door, take the photos yourself and do the full without doing the full and avoid any assumptions. In some instances lenders don’t want the homeowners contacted. In your personal instance, the appraiser was indeed sloppy by not calling you and getting info about your property from you.

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      • Baggins Baggins says:

        Know your client. Know your order type. There is no firm rule of thumb. I like drive by’s for non distressed refi’s, low ltv sales, early term refi’s. Drive by’s in uniform tract housing is easy, especially so if there is a semi recent mls sales record. You don’t get the 2055 if the borrower is in manual underwriting territory, so in that case, low liability exposure to boot. Win Win.

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    • Avatar Bill Johnson says:

      What responsibility does the lender have Nic? Considering every lender and or AMC they hire seem to know everything about everyone’s property, did they conduct an interview with you regarding your properties characteristics and or features? Considering they are entrusted to spend your appraisal fee, how can that be done to the fullest if you are not presented with the opportunity to discuss what your property is compared to what is shown in public record file?

      So Mr. Smith, according to public record files your property has X, Y, and Z, can you confirm this and or tell us more about what might actually be on site? Perfect Mr. Smith, option one is a drive by for $XXX, which will only take into account what is publicly available and what can be seen from a drive by inspection. Option two is a full interior appraisal $X,XXX where those extra features you spoke of would be observed and considered in the appraisal. Keep in mind Mr Smith, if you choose option one, option two may or may not be available to you in the future and if it is, you will be responsible for $XXX, and $X,XXX.

      What option is best for you Mr. Smith.

      Seek the truth.

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      • Avatar nick says:

        The responsibility of the lender is clearly laid out in the engagement letter. They are not professionals and cannot provide appraisal services, that is why an appraiser is retained.

        These types of conversations should are not hard to have. As if said in another comment. Whatever your comfort level is, it is. However, if a problem arises and it’s found that you did not do your due diligence, did not disclose, and did not quantify what you did and didn’t do, your appraisal will be much less defensible.

        From what I’m seeing, a lot of people are becoming more complacent with the finger pointing and the he said she said, whataboutisms.

        None of it matters when a deal goes sour and you’re held responsible. There are bare minimums that need to be met, if you’re not willing to do that know that there are inherent risks. Its not something that appraisers generally like to talk about (errors and omissions), you’re hired as a professional to use professional discretion. What’s professional? Well I guess you know it when you see it…

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    • Avatar IMJSAYN says:

      Nic, why did they order a driveby for your house in the first place? Why not a full appraisal?

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      • Avatar Nic says:

        Hi, it was ordered to complete what was needed. The lack of follow up and communication resulted in the house being significantly undervalued and multiple improvements and capital expenses being missed. The comparable sales used were poor because the appraiser had no idea the house was completely different on the inside.

        Lack of call and communication, despite attempts to reach him resulted in a very poor work product.

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        • Avatar IMJSAYN says:

          I know you weren’t happy with the value. But my question was why did they order a driveby instead of a full appraisal? What was their reasoning for not ordering a full appraisal?

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          • Avatar nick says:

            For this particular transaction, it was for a refinance. It is not that I was not happy with the value. That’s an incorrect assertion. The market value was significantly missed, the comps that were used were wrong.

            If the point of the appraisal is to arrive at market value, if the bare minimum threshold that should be met by a professional providing appraisal services is not met. There is a problem.

            A ‘drive by’ appraisal is still an appraisal. An appraiser providing appraisal services is still bound by USPAP. It’s very simple.

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          • Avatar IMJSAYN says:

            Again, you didn’t answer my question!

            What was their reasoning for ordering a driveby vs a full appraisal, particularly since you state your property was greatly improved/upgraded?

            I haven’t done a driveby in more than a decade. Last time I did a driveby was for a loan that was in default and the lender was just trying to find out if there was any equity.

            I’ve always been curious how interior condition on the date of an appraisal could be “verified” from a reliable source if the only source about interior condition is the owner, who is, by any reasonable consideration, not disinterested (or not “reliable” as a source of accurate information). It is possible to do appraisals without an interior inspection, but the circumstances under which those can be done in a way that conforms to the GSE SOW are extremely limited.

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            • Avatar nick says:

              I did answer your question, it was a refinance. I’m not going to lay out all the particulars of my personal transaction. That’s silly.

              Perhaps without Covid it would not have transpired the way it did. Regardless of what someone may feel, it didn’t pass muster with the bank. I don’t know why asking someone to make a phone call is so controversial…

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        • Avatar Bill Johnson says:

          Nick, it sounds like you don’t understand the appraiser client relationship, nor the limitations (scope of work) associated with what was being asked of the appraiser. In your example, the appraisers role is to meet his or her clients (the lender) expectations, and its up to the client to determine if that gets done. If the appraisers work is to be reviewed by the lender, by a panel of his peers, or by the state review board, their needs to be a standard applied in order to pass judgement.

          As an example, in part the scope of work for a drive by appraisal says the following.
          (1) perform a visual inspection of the exterior areas of the subject property from at least the street, (2) inspect the neighborhood, (3) inspect each of the comparable sales from at least the street, (4) research, verify, and analyze data from reliable public and/or private sources, (5) report his or her analysis, opinions, and conclusions in this appraisal report.

          Before you mention number (4) above in your defense, considering borrowers have a direct financial interest in the process, their reliability as a source often comes in to play. Good luck to those appraisers defending their actions in front of the review board when no verification can be found outside of what was said to them from the borrower.

          Unfortunately Nick, no where in the review process would the borrowers expectations, or your want to expand the scope of work be given any weight.

          Seek the verifiable truth.

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          • Avatar Nick says:

            Hi Bill,
            I had nothing to do with the appraisal, the issues and objections came from the bank because they were aware of the changes that had been made to the house (that were not represented in the appraisal, in fact the appraiser wasn’t even aware because he didn’t complete any due diligence). Again, the scope (as you put it) was to arrive at market value. I’m sure you wouldn’t disagree that if you’re basing your analysis off of faulty SQ FT among other things, that objectively (because that’s what the profession is built off of, objective data, analysis and professional discretion), then the appraisal would be flawed and rejected by a reviewer (which it was).

            I’m sure you can appreciate that the banks are not all unawares when it comes to our profession. To be more clear, the intended user, THE BANK, was not happy with the work. Neither was I but that’s besides the point.

            You can’t limit your scope of work when it doesn’t even meet the threshold of USPAP or an appraiser, licensed professional providing appraisal services. Based on your response, I guess we just have to agree to disagree.

            It doesn’t take much to give 100%; when I get to the point where I don’t care anymore, well then it’s time for me to retire.

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            • Baggins Baggins says:

              This long stream of conversation can be answered quite easily. Know your client. Know your order. What about the dude whom owns it or has substantial equity, just dipping in for a little cash or copping a better rate. Who cares if the numbers are not entirely accurate, the appraiser can be off by half and it’s still all good from both the lenders and borrowers perspective. If they want to press the easy button and get a report with more reliance on assumption and never have to bother with an appraisers visit, that’s their choice. Skip the preforeclosure drive by’s, they never end well. If you find yourself dealing with a lender or amc pushing drive by’s so they can pocket some skimmed appraisal fee money when they should have ordered a 1004, find a new client entirely.

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              • Avatar don says:

                If the opposing parties think your work stinked, And you got paid.
                You did good!

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                • Avatar don says:

                  I have accepted several assignments, when instructed NOT to allow the owner to Know. Some of my clients were buying the Note represented by the Trust Deed, and they didn’t need competition from the property owner. My client-investor sought Due Diligence for any future possible litigation.
                  I always used an engagement letter for my contract explaining both My CLIENT, USE & FUNCTION.

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  2. Avatar Bill Johnson says:

    As a single number, the appraisers opinion of market value is neither high nor low, but only gets interpreted as such when other parties consider their interests.

    Instead of putting profits before principle people, seek the truth, support the truth, and defend the truth.

    Seek the truth.

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  3. Avatar Kimberly says:

    Stop commenting here on the Money article. Write the author and educate her. How many of you have done that?

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  4. Avatar don says:

    Appraisers have to be very careful of the language they use especially their Definition of value: Foreclosures, ERC, proposed construction, are conditions that require refinements to the generally understood F.M.V.

    Lenders foreclosing may require three values; AS IS value, an estimate of the repairs, and the As Repaired estimate. As repaired is NOT a simple subtraction of the repairs from a the value in good condition. Frequently an investor is the logical buyer and investors require capital and the promise of profits, regardless the underwriters objections. Some loans hold the borrower responsible for damages and loss in value, understand the situation and price properly, you may have the opportunity to testify.

    Employee relocation appraisals are for the future purchase of the property, typically 3 months, Many markets are moving within 30 to 45 days in the active season. We have all seen the winter slow, the spring rush and enjoyed a quiet thanksgiving and Christmas. The ERC form clearly requires a future value by contract.

    SFR’s are generally completed before the lending rules nullify your appraisal, however from time to time you may be required to Re do the original report.

    Analyses, words, and complete explanations are necessary to serve your client and protect yourselves.

    These values may be different but are correct for the values explained. NOT LOW Balls.

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  5. Matt Beiseigel on Facebook Matt Beiseigel on Facebook says:

    I have noticed an uptick in reconsiderations of value lately. Got one this am. Had one over the weekend.

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  6. Avatar Dave says:

    I printed the same article off last week I saw from Money in the web. They say an appraisal that comes in below selling price is considered a “bad” appraisal. Really.

    What’s so bad about an appraisal that is actually reflective as past sales and not these hyper-price sales that people are so will to pay with other people’s money?

    I currently note in all my appraisals that buyers are currently acting irrational and are inflating values due to the lack of inventory. The effect on the long term market is not known to the appraiser, however, the appraiser forewarns the lender/client of possible side effects of current actions in the market place. I’m not sure if this covers our back sides for all the future repos that coming, but we can only state the facts.

    But what does value or money really mean these days when of federal government prints trillions and gives it away hoping they can forgo the coming collapse. I guess we can only sit back and watch how it plays out.

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  7. Avatar Bill Johnson says:

    Interesting thought. As of yesterday (year 2020 only) I have cut value by more than 2 million dollars relating to purchase assignments. More interesting, is that most transactions still move forward with the final negotiated price often landing somewhere between.

    This is not a trick question, but if an appraiser earns, $50,000, $100,000 or $500,000 a year, but saves borrowers $500,000, $1,000,000, or $1,500,000 per year (negotiated prices), what does the appraisal cost the average consumer?

    Although my sample size is small, and perhaps tweaked due to the fact my typical transaction is now over $1,000,000 per, by my numbers, I would argue that for every $1 spent on the appraisal, on average $3 is saved.

    Seek the truth.

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  8. I am in a market that has been appreciating since 2014 and the stats are reported by the MLS and the University in their community indicators. They support each other and my stats if we are near the predominant value reported for their studies. The range for the growth is 10.4% to 11.9%. The more affordable homes are well above that. We have inventories that range from 1/2 month to 1 month. We would expect to see 4% +-. I have reviewed numerous appraisals that report that our supply and demand are in balance and that the market is stable. No adjustments for market conditions for any of the comparables.

    We sign each report attesting to the value estimate being “as of” the date of inspection in most cases. Guess what appraisers, if there are 5 offers that bid the price up, that is market data for the comparables. Your opinion of market growth should be based on the data! It is an egregious error to not bring your data current when even 5th graders know that the market is growing significantly. Talk about our reputation as appraisers when we do not consider the market as of the effective date of the appraisal. If you have a complaint filed against you and your MC analysis is bogus and unprofessional, guess what, you deserve what you get. Please don’t call yourself an appraiser. You are the one that causes honest and professional appraisers to have a negative reputation by the public and all that rely on our services. Guess what, all the course work and exams do not test if we are willing to do the work to warrant a reasonable fee. BTW, if you find that the MC analysis and addendum are a waste of time, you are most likely not doing the analysis correctly or you have so few sales that the indicators are anomalous.

    5-6 hours on average nationwide to complete each 1004 URAR appraisal?! Please tell me what market has that much data that you only need 5 hours to do a professional job. I need 10 – 12 hours to do the job right. 35 years in this profession and our secondary market appraisals are no better than they were then.

    Yes, too often appraisers do not bring their values current! That would take time, right! Low appraisals when there are 5 offers above the appraised value, yes that could be a bad appraisal. We are pledged to use the most current market value, why would you ignore it! Talk about USPAP violations. We do not deserve to be thought of as professionals if we haven’t earned the title due to putting out high quality work.

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  9. Avatar David Hoffer says:

    Sometimes the instructions from the client is not to enter the property.

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    • Avatar David hoffer says:

      If the correct sales are used then there is no such thing as a low appraisal. Unfortunately most appraisers do not use the right sales because they are subconsciously trying to make value. It is difficult at times but you must take a step back and detach yourself from the assignment. I am on the va panel. When I was approved I was told that the appraiser is protecting the veteran.

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A Low Appraisal is Now a Bad Appraisal

by Dave Towne time to read: 2 min
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