The Spector of a Bum Appraisal Looms Large in Forest Hill

The property for sale was in near-perfect condition. An excited buyer was anxious to move in, and a happy seller was ready to move closer to her job. And, perhaps most importantly, the contract price was well within the ability of the buyer to afford, and it was reasonable; the house had appraised for precisely the contract price a little more than a year ago. Then an appraisal bomb blew the deal up.

As a REALTOR I have been doing business in Forest Hill for several years. During that time I have been involved in three deals where an appraiser’s valuation put a transaction in jeopardy. Two of them closed. This one didn’t. The spread between the appraised price and the contract price was too great to bridge.  But the deal didn’t go down without a fight. Based upon my well-informed arguments, the lender, Bank of America, agreed to review the valuation with the appraiser and to conduct a field appraisal to assure that the subject and the comps were reasonably consistent with one another. We argued they weren’t. The lender said they were just fine.

In a perfect world the value of houses for sale would be benchmarked against very similar, recently sold, nearby homes. The word similar means a whole range of things such as size, style, condition, amenities, school systems, neighboring homes, recency of sale, market trends, etc. Very similar tract homes or nearly identical condos head the list of near-perfect comps. Importantly, the more different comps are from the subject…

  • the more judgement is introduced into the process.
  • the more risk there is for the lender who is the appraiser’s client

In the case of my client’s collapsed deal, two of the three comps were poor matches with the subject. However, the problem for the appraiser was that there were no other comps to use if (1) they were to be drawn from Forest Hill, and (2) the comp sales were to have taken place within the past year. (Note: most lenders and, perforce, their appraisers, look for comps which sold within the past six months.)

I argued that more consistent comps would have been found if the search period was extended an additional six months. The bank wouldn’t approve that change. Nor would the bank agree to using comps from nearby towns with similar housing stock.

This is clearly a problem not unique to Forest Hill, but it looms especially large in Forest Hill. The following chart, based upon GSMLS data, shows past-year sales broken out by price range in the Historic Section. Between the mid-$400,000s and the mid-$700,000s, there were no sales and, therefore, no comps.

comp chart

Comps will remain a problem for Forest Hill. It’s a very special market, and, arguably, it’s getting more special every day as more classic Forest Hill homes are being restored. But it will forever remain a small market. So, if you are thinking about putting your home up for sale, here are some recommendations. In general they apply to both active price ranges where there are comps, as well as inactive ones where there aren’t any.

  • The more information that appraisers have about Forest Hill, the better. Ask your REALTOR to put together a package of material that will show how appraisers have dealt with the comp matter.
  • Ask your agent which comps he or she thinks an appraiser will use and to supply information detailing why your house is superior. Remember: it’s highly unlikely that the appraiser will have seen the inside of the comp houses. That’s also a good reason to use a REALTOR who specializes in the area.
  • Ask your REALTOR to provide positive trend data for both Newark and Forest Hill that will enhance the lender’s expectation that a loan on your home will be secure
  • Give a list of recently done improvements along with the money spent for them to your REALTOR, the buyer’s REALTOR and the appraiser.
  • Before making improvements to your home in the expectation of putting it on the market, find out the dollar contribution to value that these improvements will make.
  • Do inside and outside maintenance. Appraisers are affected the same way buyers are.

Finally, the appraisal process is not an exact science; it requires a great deal of highly experienced judgement. Add to that the fact that, to some unmeasurable degree, valuation is dependent upon who the appraiser is working for…the seller or the lender. That means there are a range of acceptable valuations. Your interest is in getting it as high as possible. You and your REALTOR can help.

 



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