This post features Scott Murphy with DS Murphy & Associates, a residential and commercial real estate appraisal firm . I asked him to provide answers to these questions. Click on read the rest of the story for the full interview.
1) What is an appraisal?
An appraisal is an estimate of market value based on three approaches to value; sale comparison, cost and income approaches. The sales comparison is most often given the most weight because it relies on the actions of buyers and sellers.
2) What is the difference between a market and refi appraisal?
Technically there is no difference. The appraiser is ask by the client to render a professional, unbiased opinion of market value. Why then do so many refi appraisals come in higher than purchase or “market” appraisals? The answer is lender/client pressure. I am not sure how much time or space you have for me to fully answer this question but here is the abbreviated response. Appraisers have been put under a great deal of undue pressure to meet a pre-determined value. But you say “appraisers are licensed aren’t they – why would they yield to pressure from a loan officer or borrower to “push” the value? Well, you need to understand the “food chain” in the mortgage process. Until just recently, loan officers were allowed to choose the appraiser. This creates an obvious bias. The appraiser feels obligated to satisfy the loan officer in order to receive additional work. And loan officers used that power to coerce the appraiser to come in at a higher number. I have had loan officers tell me “if you can’t get it to $X I will never send you any more work and I will tell others here at my mortgage company not to send you work”. Why would mortgage company management allow this to happen? Because they are all on commission and if the properties do not appraise the loan can not go through. So you have a reverse standard – the bad appraisers are the “good appraisers” and the good appraisers are the “bad appraisers” – in the eyes of the loan officers. Finally, through federal mandates, this is all changing. Two years ago mortgage bankers (lenders with banking division – therefore regulated by the federal government) had to go to a round robin type of assigning process and loan officer not only could not choose the appraiser – they were strictly prohibited from talking to appraisers. Come May 1st the an even more strict program will be rolled out for mortgage brokers (non-bankers, regulated by the state). They will have to turn in their loans to the lender and the lender will order the appraisal (slight variations in policy base on specific lender). Most mortgage brokers have no idea it is coming. I also forecast that many mortgage brokers will go out of business if they can not control the appraisal process.
3) Can I sell my home for the price you give me?
That is the point of an appraisal. We are to estimate the current market value – what the client could turn around and sell the house for. However, we are in a declining market and my appraisal uses sales which have occurred in the past. We do the best we can to utilize active listings and adjust sales for depreciation but a market value appraisal today is a moving target and often a “best case” scenario. We do a lot of pre-listing appraisals and advise our clients to list at or below our appraised value. Visit our website, www.dsmurphy.com for a great article about pricing your home in this market called “Chasing the Market”.
4) What qualifications do appraisers have?
Appraisers are licensed by the state. There are three tiers to licensing; Register – basically they have taken the introductory classes and passed an exam – they are now allowed to work as an apprentice to accumulated the required 3000 hours of experience in order to advance to the Licensed level. Licensed appraisers generally have minimum 2-3 years experience and can now sign MOST of their appraisals on their own. The final level is Certified – you can be Certified Residential or Certified Commercial – qualifying you to appraise the respective property types. Beyond that, there are designations – such as SRA or MAI. Those who obtain these credentials have extensive experience and demonstrated a high level of competency. However, no matter how credentialed an appraiser is – local knowledge is extremely important.
5) How much does an appraisal cost?
A typical residential appraisal cost between $350-500 (I have done some complex properties where the fee exceeded $5000) and generally takes about a week to complete. A typical commercial appraisal is $1500 – $5000 (fees on commercial property can be far greater than this) and takes about 30 days to complete.
6) How long are they good for?
An appraisal estimates the value of the subject property as of a certain date in time. Lenders used to feel the value was good for ~6 months; however, with the declining market most require some type of update after 90-120 days.
7) I know what my neighbor paid for their house. Why should I get an appraisal?
There are many good answers to this. If your neighbor just sold their house yesterday and it is the EXACT same model with the EXACT same upgrades – sure, you don’t need an appraisal. However, more typically you neighbors house sold 6 months ago and it has a finished basement and you do not – it has brick siding and yours is stucco – you get the idea. Most homes are so different and the market is changing so quickly that it s imperative to get an honest, unbiased opinion of value at the time you list your house. You might say – “well I have an appraisal here from a refi 14 months ago – can’t we use that?” I think if you have read this blog to this point, you can answer that question. Or you might say “Barry, you are a real estate expert, can’t you just run one of those CMA things and tell me what to list my house for?” With all due respect to Barry, he is a fantastic agent and can probably tell you pretty well what you home is worth – but he is not the VALUATION expert – he is the SALES expert – no one can do a better job SELLING your home than Barry – but he defers to the VALUATION expert – me – to zero in on the exact right number. I do this all day – day in and day out. I am trained to interpret buyer and seller actions in order to make the correct adjustments – and here is the biggest thing – I have access to proprietary data that most agents do not. Do you know that that physical data on almost every tax record is incorrect. Furthermore, most tax records do not have basement space on them and none have finished basement space. This is the only source of physical data available to agents. But appraisers have a database with our appraisal data. We measure every house by hand and use strict standards so we can share this physical information.
8) Who hires an appraiser, me or my lender?
Well we do appraisals for all types of reasons; divorce, estate settlement (death), tax abatement (every one of you are probably over assessed – we can help you fight the county and get your taxes reduced, mortgage, relocation, pre-listing, foreclosure, REO, etc. Most of those we prepare for you, you order the appraisal and you are my client. If you are applying for a mortgage, the lender must order the appraisal. Some people call and want to get an appraisal and then go shopping lenders – you can’t do that – the lender must order the appraisal. As a matter of fact – in a mortgage transaction they are my only client. You are not my client; I can not discuss the value with you or even give you a copy of the report without their permission. Wait a minute you say…. I paid for this appraisal – it is my property!! No, you went to the lender to get a loan. They said – we might give you a loan but we need to do some research; I need to pull your credit, look over your financial, get your collateral (you home) valued so I know how much I should lend you, etc. You are simply reimbursing them for THEIR expenses. Up until about 10-12 years ago, you were not even entitled to a copy of the report. It is none of your business. It was prepared for the lender so they could make a lending decision. On a commercial loan, even today, you are not entitled to a copy of the report.
9) What process is used to determine a home’s value?
As I mentioned above we use three approaches to value. The most important to a residential single family home is the sales comparison approach. What did other homes in your neighborhood sell for – and we compare them to yours. We make adjustments based on what the typical buyer would pay for a particular item. For instance, if you have a 3 car garage and the sale has a 2 car garage – we extract from other sales in the area that the typical buyer would pay an extra $10,000 for that and we add that to the sales price of the “comparable”. We make similar adjustments to all the other features of your home and arrive at an “adjusted range of value”. Once the “comps” are adjusted the resulting range is say $232,500 to $241,300. We look at all the sales, but weight on the most similar or most recent and arrive at a value somewhere in the middle. Refi’s coincidentally tend to always fall at the upper end of that range. I do not “push” values – many loan officers say I am conservative. Don’t think so – I am just honest. I am not doing you any favors if I “push” you value and then you lose your job and have to sell. Now you are upside down in your house and can’t sell for what is owed on the house.
10) Why can’t I just use the value on my tax bill?
If you are not over assessed this year – I can almost guarantee you will be next year. Values have dropped 10-30% throughout Atlanta and most of the country. Furthermore, Atlanta is plagued with mortgage fraud which artificially inflates assessments. Assessors are not decreasing assessments. Counties are already loosing so much money based on this bad economy, drop in sales tax dollars – their biggest revenue stream is property taxes. I have worked so many clients who are so blatantly over assessed but the county refuses to reduce the taxes and forces them to take the county to court. Just this week I completed an appraisal in Clayton county. Property is assessed for $271,000 appraised value $30,000!!! Clear as day but the county would not budge. So if you think you are just going to send a letter in and get the $20,000 or $30,000 deduction in assessment that you feel is due – forget it. Remember, assessment cycles are typically 3 years – so a reduction can go a long way.