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What Your Appraiser Wants You To Know
Here I take up Claire’s challenge for folks with specialized knowledge and tell you about the job that actually pays my bills.
So you’ve decided to buy or refinance your house. Congratulations! Now, here are the things that your appraiser — and by extension, your appraisal management company (where I work) — want you to know.
1. You need to actually want a loan.
One would think that if a potential borrower has gone to the effort of applying for a loan, he actually wants it. However, between 5 and 10 percent of our appraisal orders are cancelled because after our potential borrower has submitted his application and been pre-approved; after the bank has hired us to find an appraiser and we’ve found a local one with an acceptable fee and turn time; and after she has set up an appointment to inspect the property, we find out that the borrower has decided to not take out the loan. It’s a wonderful waste of everyone’s time (and if one doesn’t cancel before the appraiser has gone out to inspect, it’s often a $75-100 fee eaten by one’s banker). If you don’t want a loan, don’t apply for a loan. It’s not that hard, people.
2. Keep appointments.
All homeowners (and most renters) have a horror story about waiting some ungodly amount of time for a promised home repairman or delivery agent. Given this, why would you set up an inspection appointment and not be home for someone to inspect the house as a necessary precondition of the loan you want? These appointments aren’t assigned by some computer — one has an actual conversation with the actual human being who will come out to set the appointment. Don’t lie to them — because if the appraiser has to go out an doesn’t get to see the property, that’s a $75-100 trip fee.
3. Clean and prepare your house.
I’d like to say that no one was ever denied a home loan because their house was dirty. And that’s true, for a reasonable definition of dirty. However, the things I have seen …
- Nineteen cats in one house;
- Porn on the TV;
- Dozens of unflushed toilets;
- Dozens of green swimming pools (this one is actually considered a health hazard by FHA);
- Carpets soiled beyond repair;
- Floors and walls unseeable because of mountains of clutter.
If the appraiser thinks the clutter rises to the level of a health or safety concern — and yes, it happens — one of the preconditions for the loan can be for the detritus to be removed and another inspection performed. Again, that’s another fee — because appraisers don’t drive out to houses for free.
4. Obey local building codes.
This seems like it would go without saying, but all too many borrowers don’t seem to grasp this important point. Some jurisdictions are nice — renovations or additions either require no permit or have a streamlined after-the-fact process for construction done in a workmanlike manner. Other states, such as the Democratic People’s Republic of California, do not, and will go so far as to require that one’s garage conversion, or basement kitchen, or (I kid you not) the outdoor hot tub installed in the second-floor master bathroom be removed, if they find out about them. (Okay, ripping out that last “remodel” was probably a good idea.)
Because banks want to know if improvements were permitted, the county can figure out that there might be non-permitted improvements when the appraisers call them. Note: the craziest way I’ve seen someone get around this is by insisting that the garage still was a garage and not a bedroom — because the garage door was still present and functional, even if there was a made-up bed and dressers present. After all, garages aren’t required to have room for the car …
Related Public Service Announcement: If one lives in Alaska, California, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Maine, Maryland, Massachusetts, Michigan, Minnesota, Montana, New Hampshire, New Jersey, New York, North Carolina, Oregon, Pennsylvania, Rhode Island, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, or Wisconsin, one may be required to have one or more carbon monoxide detectors in your home. (Also, please don’t call them CO2 detectors. I will laugh at you.) If one lives in California, Oregon, Washington, or Nevada, one is required to have double earthquake straps on a water heater with a tank. One can take care of these requirements before the appraiser comes out, or one can pay the appraiser to come out later. May I suggest the route that involves getting more of one’s money sooner?
5. Price does not equal value.
Okay, this one is so fundamental that I feel I should repeat it.
Price does not equal value.
You had frescoes of angels hand-painted on your master bedroom ceiling that cost $8,000? Good for you. But they don’t make your house worth another $8,000. You spent $20,000 on a kitchen remodel? Enjoy it! But if prospective buyers in your neighborhood are only willing to pay an extra $10,000 for an updated kitchen instead of an original kitchen, then the appraiser is only going to assign it an extra $10,000.
A residence is not an investment. Buying a home is just a way of losing less money than one would by renting. The vast majority of people do not profit from their home after taking into account inflation and maintenance (costs of both time and money). As such, make whatever improvements to one’s living space because you want to live with them, not in the hopes of a fatter check from the eventual sale.
6. The appraised price is derived from what other people are paying.
An appraisal works by selecting three or more recent similar sales. What’s recent? Within one year, if the loan will be sold on the secondary market. What’s similar? Well, it’s the old Potter test for porn. The appraiser looks at above- and below-grade GLA, bathroom count, bedroom count, site size, quality, condition, parking, location, age, view, distance, and neighborhood, and can select other factors to compare as well. Ideally, the prices of the comparables are both higher and lower by less than 10 percent of the appraised price.
Then the comparables are adjusted by dollar amounts for each characteristic. Ideally, each line adjustment shouldn’t be worth more than 10 percent of the final price; the total of the positive and negative adjustments shouldn’t move the original comparable price by less than 15 percent, and the total of the absolute value of the adjustments for each comparable shouldn’t exceed 25 percent. That’s easy in Washington DC, not so easy in the Okefenokee Swamp of the Georgia bootheel. (Especially when the latter was a retired chicken farm complete with a giant chicken coop on 50 acres. There are only about 2,000 houses in that entire county!)
As in point 5), the value of each feature is only worth what someone else is willing to pay for it on a similar sale. If the appraiser can’t find proof that someone will pay more for an indoor swimming pool than an outdoor one, he can’t assign any additional value to it. If the appraiser can’t find anyone who wants to buy a six-bedroom mansion in a blue-collar community, well, you aren’t going to get the price you would if that house was in a ritzier town. Likewise, the three-bedroom, two-bath, builder-stock ranch starter home that costs $120,000 in flyover country is worth $700,000 to the crazy people who want to live in San Jose.
7. It’s a heavily regulated environment.
My job is the exactly the kind of job I wish didn’t exist. It exists for very little reason beyond regulatory compliance. Dodd-Frank included strict new restrictions on appraisers and banks to help prevent fraud. As such, it is nearly impossible for an appraiser and a loan officer to legally talk to one another. Enter the Appraisal Management Company, stage left.
We exist to provide an intermediary, ensuring that banks can’t pressure or retaliate against appraisers to get the value they want. This entails a complicated and lengthy communication chain. The borrower applies for a loan from the bank. The bank orders an appraisal from us. We contact appraisers until we find one with a fee and turn-around time that will work. The appraiser contacts the borrower, and an appointment is set up. However, that appointment and questions about the physical characteristics of the property are the only things that the borrower and appraiser are allowed to talk about. The appraiser sends the appraisal to me; I make the call to send it to the bank, and then the bank sends it to the borrower. If the borrower has any questions, they have to go through the bank, and then to us, and then, if they’re not insulting to the appraiser, we pass them along. It’s a slow process, all the more so because far too many people don’t understand how to communicate.
8. It’s full of morons.
This is an actual revision request from a lender: “Pictures of sheds shows animals. Cannot determine what kind of animal in pictures appraiser to comment.”
Keep this in mind when you wonder how the housing crisis happened.
Published in General
In my defense, I only have two bathrooms. The other 10 toilets are unplumbed, which makes them difficult to flush.
I’m reluctant to take issue with this statement, because you’re correct. I would just take it one step further. The conventional wisdom that it’s better from a financial perspective to own than rent is wrong more often than we suspect. In my area back in the early 2000’s when my wife and I bought our home, renting was the better way to spend money. It still is here. That said, we purchased anyway, because there are benefits of owning that are worth paying for, and we could afford them. There are also substantial financial risks associated with owning – many unmitigated by the way most people insure – that one can avoid by renting.
I encourage potential buyers to challenge the conventional wisdom and run the numbers themselves, especially if they’re advising young people who have less experience to draw upon. We got bad advice from older people when we were preparing to buy, and it was the same bad advice from nearly everybody. Such is the nature of conventional wisdom. It can be wrong for a long time before anybody notices.
Fascinating and useful, Amy. There’s a certain amount of wishful thinking that afflicts most of us homeowners.
My understanding is that there is absolutely no improvement which will definitively increase the value of one’s residence. In your experience have you ever encountered an exception to this rule?
Eh, kinda sorta. Homes are graded by appraisers on a C1 – C6 scale, with C1 being a brand new home and C6 being uninhabitable. The secondary market refuses to lend on anything in worse shape than C4, which is defined as no updates in at least 15 years and minor to moderate deferred maintenance.
One can almost always make money bringing one’s house up to C4. I can see this with FHA 203K loans, which are basically a mortgage submitted with a contractor’s bid so that the collateral will be the renovated house, not the house in its current condition. It’s not unusual for a house in C5 or C6 condition to sell for $90K, have a bid for $45K of repairs (new floors, patched walls, new cabinets, new appliances) and then have it appraise as a C4 at $225K.
When the house starts out as C4, one doesn’t get those kinds of profits. One can get 203K loans for inhabitable houses, but generally the appraised value is within 5% of the pre-remodel value plus the cost of the renovations. And replacement-type improvements (new roof, water heater) don’t add value, so much as they make sure the home doesn’t lose value as compared to its comparables.
So basically, you’ll make money on any improvements that fix health and safety issues, you’ll come close to breaking even on keeping the place in reasonable shape, and anything else you’re doing it because you’ll enjoy it, not because you’ll make money on it.
Are they llamas or alpacas? I say llamas.
Per the appraiser, they are “lamas.” Though they don’t look like Buddhists to me.
If you’re wondering why I have no faith in the education system, it’s dealing with this all day.
I don’t know if these new regulations are working, but I learned something fishy was going on circa 2006 when I asked a very experienced real estate agent if houses ever appraised lower than the sale price. “Maybe one in ten years,” she said. Huh, I asked, do they ever appraise higher than the sale price? “Never.”
No coincidence that real estate is a rent-seeking industry.
Awesome, Amy.
Oh, if only we never had houses appraiser under contract price …
There is a procedure called a Value Reconsideration. The bank (well, the borrower and/or real estate agent) submits a list of things the appraiser missed, both home improvements that may increase value and other potential comparables. Because homeowners are irrational about their house, they will insist on silly things, like that garage door openers add at least $500 to the house. Because realtors are completely rational about their commission, they will suggest comparable sales that are younger, bigger, better kept up, and in far off neighborhoods to pump up the value. Between the VRs that we don’t even bother to send to the appraiser because they’re so insulting and the ones we do get back, we see an increase in value 5-10% of the time. Sometimes, appraisers do make mistakes, after all. (As I often have cause to say, “If appraising were hard, appraisers wouldn’t be able to do.” Normally followed by, “The only people dumber than appraisers are bankers.”)
My dad talks about #5 a lot. As he puts it, if a real estate agent convinces you to spend $20k upgrading your kitchen, and the house then (a) sells faster and (b) for $10k more than it was supposed to, the agent gets an extra $600 in their pockets, and faster than they otherwise would have.
That does not mean that you, the seller, benefited from the upgrade.
A residence is not an investment. Buying a home is just a way of losing less money than one would by renting. The vast majority of people do not profit from their home after taking into account inflation and maintenance (costs of both time and money). As such, make whatever improvements to one’s living space because you want to live with them, not in the hopes of a fatter check from the eventual sale.
Bless you, Amy Schley. I would like bumper stickers that say this, and I would like to tattoo it on all of my in-laws.
I bought a house in a moderate neighborhood, that was appraised by someone hired by the real estate company. It was inspected by Sacramento County for compliance to county code. What I found after purchase:
1. Drug dealers lived next door. I attempted to get out of the deal by “failure to disclose” but that went no where. Built a 6′ fence down the entire length of the property line. Formed a neighborhood watch group, 6 months later the punks were gone and managed to get Sacramento Co to temp condemn that property.
2. Decided to replace all window, door, and floor moldings to remove lead based paint rather than painting over it. Found dry rot and termites under all windows and behind all baseboards. Necessary to replace all sheet rock in 5 rooms. Hired an exterminator.
3. Decided to put up a wall with a door across the L of a large room to make a small office. Both areas had a small ceiling light bulb. Electrician opened the wall to locate source of wiring and discovered the entire area was wired with lamp cord.
So much for appraising and inspections.
Appraisers aren’t home inspectors. An appraiser’s job is to provide a value of the collateral for the bank. Sounds like you either didn’t get a home inspector, didn’t get a decent one, or the defects were hidden in ways that were outside the scope of even a home inspection.
Right, all of them totally incompetent. The exterminator showed me how to inspect for dry rot and wood damage with a pocket knife. Since this was the first house I had ever bought on my own, too bad I didn’t know any of that. My grandson nearly bought a $250,000 house with a rotten under-roof. I had told him about my woes buying my house, so he hired an inspector outside of the local system, paid him $500 for a thorough inspection, got what he paid for. It had never crossed my mind that realtors, appraisers, and inspectors would scam a buyer. But they all got their money for the “services” I paid for. You’d think the value of the place would go down if it was rotten to the core.
That alone would preclude me from having your job. I’d herniate myself.
I can laugh or cry at ignorance. I choose to laugh. Also, random pet pictures help — I remain in awe of the appraiser who took a picture of the backyard at the exact moment the dog was relieving himself.