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Have you jumped on the refinance bandwagon? If not, you may want to consider it. As of the end of October 2020, interest rates on a 30-year refinance mortgage were averaging around 3.2%. These are the lowest rates in the last 40 years! If you decide to take advantage of these all-time low rates, your lender will most likely order an appraisal. What happens if the new appraisal is less than original one? Before you assume the appraiser made a mistake, let’s look at three reasons why a new appraisal could come in low.

The Case File

Front of a navy painted house with lights on.

Three years ago, James Brown purchased a nice three-bedroom home in a quiet town with good schools. The home had been recently renovated and was in great condition. He paid $475,000. The appraisal at that time matched the purchase price.

James wants to do a cash-out refinance and get $15,000 to pay off some other debts. To make that happen, the lender says the appraisal needs to be at least $494,000. James expects it to come in close to $505,000. When the appraisal comes back, however, it was for only $489,000.

James is devastated. The lender suggests that he takes out only $10,000 instead of the $15,000. The appraiser looks like the bad guy. But what could be the cause of the lower than anticipated value?

Reason #1: The Range of Value

The primary reason appraisals differ is because, in reality, real estate appraisals are designed to provide a range of value rather than one set price. A real estate appraisal measures the actions of typical buyers and sellers in the marketplace and rarely do two buyers offer the same exact amount.

Let’s say that Mr. Brown decides to list his home. He lists it for $530,000 and expects to get an offer at $505,000. Within one week, he receives 100 purchase offers. Of those 100 offers, we could expect that approximately 30% would be ridiculously low and 10% would be really high with a slew of ridiculous contingencies. The remaining 60% would be considered reasonable offers. There would be some low cash offers and some high offers with contingencies such as seller paid closing costs or closing delays (i.e. buyer needing to sell their house first); but generally speaking, all the offers should be within 10% of each other. All the reasonable purchase offers created a range of value.

Using our example of Mr. Brown’s house, 60% of the offers would be between $480,000 and $530,000. While every seller would love to get the highest price, nearly all of the high-priced offers will have some sort of contingency that would make the offer less appealing. It is very possible that Mr. Brown may accept an offer of say, $490,000 if the buyer is paying cash and can close within two weeks. That accepted purchase price becomes the “market value” of the property.

An appraisal measures that value range within the report. Hence, Mr. Brown’s most recent appraisal of $489,000 is within that appraisal range of $480,000 to $530,000. It is possible that the appraiser may be willing to adjust the value up to the desired $494,000, since it is also within the range.

Now, here is a word of caution: federal lending requirements and appraisal standards do not allow lenders (or property owners) to “pressure” the appraiser into “hitting” a target number. The lender hired the appraiser as an independent third-party to provide a non-bias estimate of value. The appraiser will decide if the market data can support a change of value, but they cannot be pressured to do so.

Reason #2: Lack of Market Data

Another reason for a difference in appraised value can be caused by a lack of supportable evidence. All appraisers rely heavily on recent sales of properties that are similar to the property being appraised. Most lenders will require that all of the sales used in the appraisal have to be sold within 6 months and be within a limited distance. This can severely limit the data available to the appraiser.

Let’s say that Mr. Brown decided to refinance in the spring after what was a record-breaking terrible winter. When you combined below zero temperatures, tons of snow and COVID-19 it isn’t much of a surprise that there were hardly any sales all winter. The appraiser has to use what few sales are available if he wants the bank to accept the appraisal. This lack of data can, unfortunately, slightly skew the true market value. The appraiser has to balance the requirements and stipulations set by the mortgage market with his ethical requirement to determine a fair market value for the property. In these cases, it is common for the new appraised value to differ slightly from a prior value.

Reason #3: Economic Impact

A third, and less common, reason an appraisal comes in low is due to a change in the economic climate within the market area of the subject property. We have all seen how the national economy affects property values. A change in the local economy can also raise or lower local property values.

For example, let’s say a major employer in the area of Mr. Brown’s home shut down. There was a loss of over 2,500 jobs. Because of the uncertainty of future employment, fewer people are looking to buy homes in the area. In order to encourage buyers, sellers slowly reduce the list price of their homes. This creates lower sale prices than were seen only one year ago. An appraisal must reflect this loss in value – even if it is only temporary.

A homeowner always hope that his property is appreciating in value. A lower appraised value can seem devastating, but before you freak out and assume the worst, consider the possible causes. Look at the range of value contained in the appraisal report. What was the value of the cost approach (usually establishing the high range) and what were the adjusted values of each of the comparable properties (creating the low and mid-ranges)? If your first appraisal is inside that number, then as long as the appraisal can be used by your lender for the refinance, do not fret, the value is still there.

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Choosing an appraisal firm to handle your sensitive commercial and residential valuation needs in Massachusetts is an important decision. When considering lending money, or working with a third-party that will rely on your appraisal, it’s critical to ensure that the valuation is accurate, credible, and reliable. A faulty or biased report has the potential to setback your operations, result in missed opportunities, and damage your reputation. Read on to gather some essential advice for selecting your next appraiser.

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Many Massachusetts valuation clients choose to work with appraisal management companies (AMCs) due to the fear of compliance issues with Dodd-Frank and the Consumer Protection Act. It’s a common misconception that to avoid bias issues, and maintain transparency, that you have to use an AMC. For a brief period after the financial crisis of the late 2000s, it was the case that some parties in the real estate business were required to use management companies as intermediaries, but those limitations expired when the Home Valuation Code of Conduct restrictions went out of effect. You now have the option to hire the most experienced, dedicated, and professional appraisers in the subject property’s local market.

Long-term Savings, Reduced Risk, Less Wasted Time, and Local Expertise

Choosing to work with an expert local appraisal firm in Massachusetts, and the greater Boston community, will allow you to cut out the middleman. Appraisal management firms have taken advantage of limitations created by legislation to build their market share. Independent firms have to go the extra mile in everything they do to build their competitive advantage and provide the greatest value to clients. AMCs aren’t compelled to provide excellent service or strict quality control, as they rely on industry fears and misconceptions.

Independent firms offer greater value by eliminating the excess fees and costs incurred by management companies that do little to merit the additional costs. The typical AMC quality assurance process takes 1-3 weeks, after inspection, before you receive your completed valuation report. When errors slip through, you’ll typically be left waiting another week or two before your revised report is ready; whereas, a reputable independent team of appraisers will deliver a more reliable and detailed report the first time, with prompt turnaround (48hrs), and rarely-needed revisions ready in hours or a day, rather than weeks.

When you’re working with third-parties that will rely on the content of your reports, it’s especially critical that valuations be accurate the first time. Every time a report is rejected, it incrementally diminishes your credibility and can lead to lost business opportunities, financial loss, and damage to your reputation. Impersonal management firms don’t place much emphasis on customer service and will often discourage and scorn you for suggesting that their reports contain errors.

A major advantage of selecting an independent appraiser is the greater level of local market expertise and the ease of communications. Dedicated local professionals take extra time to understand and research their markets. Appraisers that rely on orders from AMCs can become complacent in their research and diligence, and will take reports in any market, regardless of their actual knowledge of regional market factors.

Go Independent

Reduce your risk, expense, and improve your customer experience by selecting and working directly with a local, family-owned firm that genuinely cares about your business and its success. If you’re accustomed to the AMC model, you will be astonished with how efficient and positive your experience is when you work with a team of Massachusetts specialist appraisers that put quality and customer service first.

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How do you know if you’re making the most money possible from a property? Are you getting the greatest economic and functional value from your investment? How will the long-term value of the property be affected by zoning changes, new developments, and the usages of surrounding properties?

Highest and best use analysis considers these issues and provides indicators of how the value is, and will be, influenced by emerging local market factors. When you understand what usage of the property is likely to produce the greatest value over time, you can formulate development and disposition plans that will yield the greatest ROI, and reflect the most positively on your Massachusetts investment portfolio and resume.

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An appraisal is more than just an estimate of value for the subject property. It provides unique insight into a local real estate market and how a broad range of social, economic, and structural properties influence value. A property valuation is also a critical tool in lending and investment spheres that is relied upon to determine risk and make decisions with financial ramifications that extend into the millions and can create substantial operational issues when faulty. In this article we’ll talk about the key things to look for in interpreting the accuracy and quality of a commercial or residential appraisal.

Level of Detail and Accuracy

The first thing you’ll notice when reviewing an appraisal of any type, is the level of detail that the appraiser puts into the report. When you’re reading it through, what questions come to mind? What has been left unanswered? The mark of a quality appraisal is a thoroughness that addresses the market issues that are most relevant. If the subject property is in a market that is experiencing a withdrawal of industry, economic decline, or a surge in housing starts, the issue should be clearly addressed with explanations of how it affects the property’s value.

If you notice obvious errors in the property’s characteristics, you can be sure that other less obvious inaccuracies may be present. Although not an indicator of the appraiser’s market knowledge, typographic and grammatical errors can indicate a lack of diligence on the part of quality assurance staff. These small things can reflect poorly on your company and diminish your reputation with partners.

Clear and Well Supported Comments

While appraisals are sophisticated documents, they shouldn’t be obscurely worded or difficult to understand. When a claim is made regarding the market, or other influences on the property, it should be backed-up with solid market data and explanations as to their relevance. The purpose of a valuation is to provide an opinion of value as of a certain date and provide the context and reasoning behind the estimate. When the cost and income approaches are utilized, particularly in a commercial appraisal, extra time should be taken to explain the capitalization rates employed and how the value was derived.

Whereas residential appraisals primarily rely on the substitution, or market comparison method, commercial appraisals require estimates of value derived from the income and expenses generated, and incurred, by the property’s operation. This requires sophisticated methods that utilize investment trends to determine how the appraiser converted the income and construction cost to a concrete and accurate estimate of value. Not unlike a homework assignment, correct answers don’t score you full points: it’s the depth of the logic, rationale, and market understanding that earns full credit.

Accurate Adjustments

The adjustments are the additions and subtractions that appraisers make to the values of comparables based on the functional and economic differences between the properties. This helps narrow the range of possible value for the final estimate. Take a careful look at the amount that the appraiser uses to adjust the differences between the subject and comparables. The scientific method of determining the adjustment amount is termed the Paired Analysis Method.

This approach involves a statistical analysis between two sets of data for properties that are most distinctly different based on the feature in question: ex. pool vs no pool, with all other features being roughly similar. Not every appraiser has the local market knowledge, data, or skill to employ this method, and will base adjustments on informal observation or guess work, leading to grossly inaccurate valuations, a common occurrence when an appraiser’s local market knowledge is lacking. You can use your intuition to determine if adjustments make sense considering the economic direction of the community and value of each feature.

Being Certain

Don’t be afraid to question the reasoning for comments and values; you deserve to be certain of the validity of the report. It’s worth the extra time to carefully evaluate the appraisal before accepting it as final and distributing to any third-parties you’re working with in the transaction. If you need assistance reviewing the report, reach out to a team of expert local Massachusetts appraisers to help you evaluate, and ensure your move forward with complete and accurate information.

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