The Home Mortgage Appraisal: Hurdle to Get Over or Mountain to Climb? It All Depends on the Availability of Local Comps.

Here’s the situation: You put your home on the market, but your proposed asking price, which you believe is based on a reasonable estimate of value, is considerably higher than any recent sales in your town or area.

After a period of time on the market, your Realtor nails down an offer to purchase; It’s close enough to the asking price that you accept it. The buyer is financially qualified, as is evidenced by a mortgage approval letter, the deal speeds though Attorney Review, and the home inspection goes well. Now, the sale is the hands of the mortgage company’s appraiser. If the house doesn’t appraise high enough, the deal could collapse. So, in the absence of good, local comps, here’s what happens.

The kind of appraisal most often used is based upon recent, comparable sales. It is essentially a comparative market analysis (CMA) that Realtors do all the time. No one would ever suggest that the CMA process is scientific…it relies heavily on the Realtor’s judgement…as does the appraisal. But, in the latter case, the Realtor’s judgement is replaced by that of a highly trained, professional appraiser. That’s good, but an appraisal is still a combination of objective numbers shaped by a whole lot of judgement. It may be better informed judgement, but it’s judgement, nonetheless.

On top of that, a bank appraiser has a fiduciary responsibility to protect his client’s (the lender’s) interests. In other words, better the appraiser should err on the short, rather than the long side when appraising the value of your home.

So, with that backdrop, let’s say that the offer price is $700,000. Unfortunately, the highest sales price in your area over the past six months was $500,000, a $200,000 spread. So, using that $500,000 comparable, the appraiser could try to answer this question:

What would the $500,000 comparable have sold for if it had all the features of your larger and more feature-rich home?

For example, if your property was 1,000 square feet larger than the $500,000 comparable, $5,000 would be added to the comp’s value ($50/per foot) in order to create equivalency between your house and the comparable as far as the size of the living space is concerned. Values for features like bedrooms, family rooms, finished basements opening onto patios, etc. are all added to the value of the comp to get an adjusted market value. Theoretically, the adjustments create a locational, functional and design equivalency between your home and the comp house. The problem is that the amount of judgement the appraiser would have to use to create an assumed value equivalency between the $500,000 comparable and your $700,000 house would be so great as to render the adjusted comparable of limited value.

The other approach would be to go outside your town or area to find comparable sales. The presumption is that towns or areas that are similar in character, and that are in close proximity to one another, have enough in common to be used for comping purposes. This approach, however, adds another layer of judgement to an already judgement-heavy process; that of the equivalency of neighborhoods. But, put that aside for a moment and assume that the appraiser finds a minimum of 3 good comps in this similar neighborhood. The appraiser then makes value adjustments to the comps so that they all are presumed to have a high level of value equivalency with your home.  Furthermore, let’s say that the average, adjusted value of the three comps comes in at $800,000. Is that good news? Not yet.

There’s still a matter of reconciliation. Reconciliation results in a final valuation for your property that takes into account a number of factors such as values derived through different appraisal techniques, inventory levels, market trends, and, of course, a comparison of the market in your town to the town from which the comps came.  That reconciled number could be $850,000 or $650,000 depending upon the judgement of the appraiser.

So, in the absence quality, local comps, the appraisal process carries with it a high level of uncertainty. Looking at is another way, nothing helps real estate prices to rise better than buyers willing to invest in higher priced homes. Those higher priced sales provide air cover for similar sales, thereby boosting the entire market. After all, a rising tide floats all boats.



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