Whether you’re a home buyer, seller or owner looking to refinance, you probably know the crucial importance of appraisals: They can limit the amount of mortgage money you’re allowed to borrow, delay your closing or totally mess up what you thought was a done deal.
According to survey research provided by the National Association of Realtors, more than one out of five home real estate contracts gets delayed before closing because of disagreements or problems connected with the appraisal. Eleven percent of sales contracts that explode before final signing involve appraisal issues.
That’s a lot. Say you’ve found a buyer for your house who’ll pay you $400,000. Suddenly an appraiser says it’s really worth $365,000, based on analysis of “comparable” properties sold recently in the area. Now your buyer balks and threatens to pull the plug if you don’t slash the price. You and your listing agent challenge the appraisal and demand to see what sort of comparable sales and other calculations were used to come up with a value $35,000 below what a buyer was prepared to pay.
Where to look? A massive, first of its kind study of 1.3 million individual appraisal reports from 2012 through this year conducted by real estate analytics firm CoreLogic offers a suggestion: In the so-called “adjustments” in appraisals that involve relatively subjective estimations — the appraiser’s opinions on the overall “quality” level of your house, its “condition,” “location” and “view” — rather than more objectively determinable items such as living space square footage, lot size, numbers of baths and bedrooms, etc.
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The adjustments are made to the recorded sales prices of the houses the appraiser chooses as “comparables” to get a more accurate sense of the value of the house being sold or refinanced. Say your home has three bedrooms but a nearly identical house selected as a comparable has four. The appraiser is supposed to determine the market value of that extra bedroom and make an appropriate adjustment to the value of your house.
1 out of 5 number of home real estate contracts delayed by disagreements or problems with the appraisal.
Adjustments are made in 99.8 percent of all appraisals, according to the CoreLogic study. The most frequent adjustments involve objective features of houses — living area, rooms, car storage, porch and deck were all adjusted in more than 50 percent of the 1.3 million appraisals, according to CoreLogic. As a general rule, the adjustments on objective features were not large in dollar terms. For example, “room” adjustments were made in nearly three quarters of all appraisals but averaged only $2,246, and did not affect the final appraised value dramatically.
Adjustments involving more subjective matters — the overall “quality” or “condition” of the house — were less common but typically triggered much bigger dollar changes. The average “quality” rating adjustment was nearly $15,000, which is more than enough to complicate a home sale. But some subjective adjustments on “view” or “location” in high cost homes ran into the hundreds of thousands or even millions of dollars.
Jon Wierks, senior director of decision analytics for CoreLogic told me that items such as “condition,” “view” and “location” can be “super subjective” at any price level and especially challenging for appraisers new to the field or with limited knowledge of local market trends. In one adjustment in the appraisal study, he said, a property in a neighborhood of expensive homes got a $3 million downward adjustment solely on “view.” In other cases, researchers saw adjustments of $4 million and $15 million on location issues. Did these adjustments set off battles between sellers and buyers? The CoreLogic study didn’t get into that but it wouldn’t be surprising.
Gary Crabtree, an appraiser in Bakersfield, California, told me he recently has seen “view” adjustments ranging from $100,000 to $140,000 within a golf course community and he made a $150,000 adjustment on a large luxury home because of its unfavorable location. The most accurate adjustments are based on hard local market statistical data, Crabtree says, but when they are not, valuations can end up distorted, prompting delays or blowups.
Research released last week by Platinum Data Solutions, which reviewed 300,000 appraisals made between July and September, found that fully 39 percent of “quality” or “condition” ratings conflicted with previous ratings on the same property. That inevitably invites controversy.
Bottom line: If your appraisal doesn’t square with the contract or threatens the deal, take a hard look at the “adjustments” made inside the appraisal on subjective factors such as condition and quality.
Kenneth Harney is executive director of the National Real Estate Development Center.