Appraisal issue. Need some advise from real estate investors.

[xmanz3]

Here's the situation:

We are buying an investment property in the area of Marietta, GA. The house is a 4 sided brick home, 3br/2bth fully remodeled, and is sitting on a 3/4 acre lot.

Sales price: $175,000 Appraisal value: $160,000

The seller is upset because the appraiser did not contact her since she wanted to show him receipts and paperwork of all the work done on this home ($45,000 worth of repairs and upgrades). She also said that the appraiser has no right to open the lockbox without her authorization and that real estate agents are the only ones authorized to open homes that have a lockbox.
She thinks that the appraiser never appraised the home and that the appraisal is not legitimate.

We put a stipulation on the Purchase contract that unless the property appraise equal or higher to the sales price on the first appraisal, we would not purchase the home.

It seems to me that the lady did not take into consideration how much money she was going to spend on repairs and upgrades, and now she is upside down on this project.

Why would the appraiser would work against the broker or the seller? I believe his doing his job. If appraisers would always appraise homes over the sales price without any facts they could see themselves in some serious legal issues.

My broker told me that I should not buy the home, unless I want to be the first one on that area to pay that much for a home. Again, why a broker would tell me this if he knows that by giving this type of advise I would not buy the home neither I would get a loan from him?

I would greatly appreciate your comments.

Thanks!

Xavier

[cube_rat]

There's a set of strict criteria involved to conduct appraisals and render a price (at least in California). This woman sounds p*issed off because she's not going to make any money on the deal and/or perhaps will be in an upside down position.

Oh, I'd offer her what the appraisal came in as. Or walk away. Too many fish in the sea.

[riskadverse]

Appraisers should be independent from buyers, sellers, and lenders interests. In the real world that is not always true. In a hot real estate environment, lenders will often want appraisers to come in high. I'm not sure of what goes on in a cooling market, although I would guess that it might be the reverse. While the seller might be able to influence an appraiser, you might rather trust the figures of an un-influenced appraisal.

[uncledrz]

If, with all of this information, you still want to buy the house at 175, do it, its your money. If, OTOH, you think the appraiser (and your broker) has a good pulse on the actual value, then get together with your broker and have the seller lower the price to 160---worth a try at least.

[bssc]

Are you paying cash for this? Otherwise, the bank is going to look long and hard at this. The lady should have realized that even if she paid the money, it doesn't always flow down to the bottom line.

[xmanz3]

I was going to finance 95% and put 5 % down. I believe the major reason why the house did not appraise as high is due to the living space 1400 sqft, even though the house has a full unfinished basement with 1400sqft.

[Nords]

Quote:

Originally Posted by xmanz3 My broker told me that I should not buy the home, unless I want to be the first one on that area to pay that much for a home. Again, why a broker would tell me this if he knows that by giving this type of advise I would not buy the home neither I would get a loan from him?

Quick, ask the HGTV producers from "Bite Buy Me" if they'll do an episode on your purchase!

It doesn't matter what your broker, the appraiser, or the seller think about the situation. What matters is what you think.

Who paid for the appraisal? That's who gets to talk to the appraiser and ask whether the home was entered and the $45K of "upgrades" has been included in the $160K total. If the appraiser took interior photos that would pretty well resolve any lingering access questions.

The homeowner has no recourse because she's not paying the appraiser and had already agreed to the contingency. She seems to be doing a lot of fussing with no constructive proposals.

Will you be living there for a few years or for the rest of your life? How much money are you putting into it? Is either broker willing to give up some of their share (ha!) to close the sale? $15K may be a big deal to you if you're trying to sell again in a few years but it's nothing if your grandchildren are celebrating holidays there for 20 years. Are you emotionally ready to walk away from the whole thing?

I think both the broker & appraiser are telling you as politely & professionally as they can that the house is overpriced. There's almost always another house for sale and especially so as the summer moving season ramps up.

Tell the seller that you look forward to her counteroffer or her release of the contract's deposit...

[xmanz3]

Nord,

In this case, the appraiser conducted the appraisal and he has not charge me anything yet unless I was going to purchase the property.

Can a seller demand a copy of the appraisal even though she did not pay for it? As a buyer, do I have to show the seller the appraisal if it did not appraised equal or higher to the sales price?

[Rustic23]

An appraiser uses three approaches to value, Sales or Market, Cost, and Income approach. For Single Family Residential existing property the Sales or Market approach is usually the one most relied on. It involves finding three or more comparable sales in the neighborhood that has sold in the past 6 months. Adjustments are made to those sales, where necessary for condition of the subject as compared to the sales. Sometimes value is added to the comparables and sometime it is subtracted. I.E. if the comparable is larger than the subject, a deduction will be made to the sales price of the comparable. Likewise if the subject is updated and the comparable were not, an upward adjustment is made to the comparable. The cost approach is also figured. You estimate how much it would cost to build the home, subtract depreciation, and add in land value. For the income approach you find comparables that were rented at the time of sale, determine the rent the subject would bring and from this determine the Market value of the home. In most neighborhoods there are not enough rentable comparables to use the income approach.

The repairs and upgrades she made to the home may make not difference if the sales comparable were in a similar condition. Also many upgrades made by home owners do not reclaim full value in the market place.

As far as weather it was a legal appraisal, that is another question. When you go for a loan the mortgage co. or bank will order an appraisal. They are prohibited by law from using an appraiser or appraisal selected by the buyer. Therefore, unless a financial co. ordered the appraisal, another one generally will have to be done.

Why would the appraiser work against the broker or the seller? They don’t. The appraiser must use ‘Market Value’.
Defined as: ‘Thee most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
buyer and seller are typically motivated;
2. both parties are well informed or well advised, and acting in what they consider their best interests;
3. a reasonable time is allowed for exposure in the open market;
4. payment is made in terms of cash in United States dollars* or in terms of financial arrangements comparable thereto; and
5. the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”
The appraiser likes to know what the buyer and seller agreed on, but that does not make it market value. If you close at the higher price, your house will become a comparable. Appraisers will they have to try and find out why you overpaid for the property, as it appears to be worth less. If they can’t then the next house sold in your neighborhood may be appraised higher. Appraisal is more an art than science. If it were pure math, it would be done by computers, and in fact is some areas banks are using computer appraisals. (another story)

Who can see the appraisal depends on who the appraisers client is. The appraiser can not share the appraisal with anyone other than his client without the clients permission.

[Nords]

Quote:

Originally Posted by xmanz3 Nord, In this case, the appraiser conducted the appraisal and he has not charge me anything yet unless I was going to purchase the property. Can a seller demand a copy of the appraisal even though she did not pay for it? As a buyer, do I have to show the seller the appraisal if it did not appraised equal or higher to the sales price?

Wow, I wonder if the appraiser has ever thought about working in Hawaii?

Sellers & buyers can do just about anything they agree on to close a deal. To release you from the contract, the seller is entitled to some sort of proof that the appraisal came in less than the sale price. You could try to get away with a fax copy of the page of the report containing the $160K number. Beyond that she's just delaying the inevitable, and any stalling tactics or legal maneuvers could keep her house from being sold as well as keep your deposit money from going to some other down payment. You both have something to lose from protracted squabbling.

If you want to get along with these people, and quickly finish whichever decision you decide to make, then you could let them look at the report while you stand there waiting for them to hand it back. IMO acquiring their own full copy should cost them whatever the appraiser is charging you!

I think the best negotiating tactic is to shrug your shoulders, execute your contingency, walk away from the purchase, and privately tell your broker that you'll consider any written counteroffers. Any response of yours would also be a written counteroffer. Then put the whole thing behind you and keep looking.

We had a similar situation when we found our "dream home". Our first attempt was a nice house on a lovely flag lot about six blocks from where we're living now, but it had a bad roof and significant hillside erosion concerns from the condo property next door. The seller would not budge because he "knew" what the property was worth. We offered $360K for his $400K listing and proposed other alternatives over the next two months (we were the only offer) but he counteroffered twice at that price. We made sure that we'd expressed our concerns loud & clear to both of the realtors and walked away. A few months later we did way better (twice the lot, 50% more house) for $405K. He got his price about six months later (in a rising market) and the seller has poured in an additional $50K for the new roof and hillside stabilization. We take our evening walk by the place a couple times a week... no regrets!

[macdaddy]

xmanz - the low appraisal is powerful leverage for you to lower your offer. if it doesn't appraise this time, it may not appraise for the next buyers @ 175k either. as someone mentioned, sometimes the banks won't finance you if the appraisal comes in below value. maybe you could offer to split the difference between 175k and 160k with her.

you mentioned that the house is an investment property - if so, it should just be about the numbers for you - and if the numbers "make sense" at 175k then i don't see why you wouldn't buy it. if the broker warned you off the property, it's probably overpriced... that or the broker wants to buy it for themselves (unlikely if it's been on the market for more than a couple weeks).

did you pull some comps yourself?

also, what makes you want a rental property with 45k worth of upgrades inside? i've rarely seen any return on stuff like that for rental properties. what is your investment strategy?

[xmanz3]

This home is on a corner lot across from a piece of land that a builder is going to build 32 McMansions in the 500's. Also, 200 feet down that road there are 8 homes in the 700's and 7 of them have already sold. After they sell the 32 homes in the 500's there would not be any more land with the exception of the homes across the street where I want to buy.

[macdaddy]

Quote:

Originally Posted by xmanz3 This home is on a corner lot across from a piece of land that a builder is going to build 32 McMansions in the 500's. Also, 200 feet down that road there are 8 homes in the 700's and 7 of them have already sold. After they sell the 32 homes in the 500's there would not be any more land with the exception of the homes across the street where I want to buy.

That seems like a solid play... I would pretend to walk away and offer to split the difference between 175k and 160k... if the seller is smart, you'll be fine... otherwise, they'll be stubborn and if you really want it, you'll have to pay full price.

[kcowan]

It is possible that the appraiser could not find any comparables in the neighborhood and so took the easy path of finding comparables somewhere else. Often a few blocks can make a big difference in appraised value.

Most professional appraisers do not do it for free or on contingency. So I think you need to dig deeper. If the seller gets to see the appraisal and has issues with it, ask them to fund another one and let you see it. In my experience, a spread of 10% between appraisers is not unusual. Make sure they are both market value and not replacement value. (Replacement value is often used for insurance purposes.)

In our previous life, when we were moved by the company, 2 appraisals were ordered and the home guarantee price was the average of the 2. If the spread was more than 10% (happened to us), they order a 3rd and then average the 2 closest ones. (BTW replacement values were usually higher in our experience.)

So if you can get the property for the average of 2 appraisals, you are probably OK.

[Buckeye]

We bought a beautiful house in Lakeland, Florida in a FSBO deal that came in $19,000 below the asking price. The seller was asking $217,000 and the VA appraiser would only appraise for $198,000. It was a custom built home built by a local home builder who had moved up to the big time and would never again build a home in this price range. It was also in a wonderful neighborhood with big, old oaks. The design and quality of contruction were outstanding but there were no comps that would support the $217,000 asking price.

We had just sold a home in Orlando and we had the cash to put into the deal. The house was worth the asking price to us so we paid it. We only lived there 10 months. Yes, we really miss the house and the neighborhood but we got a great job offer in Ohio that we couldn't pass up so we sold the house in 2 weeks for $217,000 with our new company paying the real estate fees.

The appraisal is important but it's not everything if you have the cash to do what you want and you have good reasons to believe the value is something different. The appraiser typically has to go by comps. You don't.

[cute fuzzy bunny]

Quote:

Originally Posted by xmanz3 This home is on a corner lot across from a piece of land that a builder is going to build 32 McMansions in the 500's. Also, 200 feet down that road there are 8 homes in the 700's and 7 of them have already sold. After they sell the 32 homes in the 500's there would not be any more land with the exception of the homes across the street where I want to buy.

Man I hate two corner lots. Only thing worse than a front yard wasting space is TWO front yards wasting space.

I'd counter at 155, because the appraiser said 160 and because it sounds like you'll be living in a construction zone for the next couple of years, followed by a bunch of unknown neighbors moving in and perhaps changing the character of the area.

I've never seen an appraisal come in at below market value, maybe off a few grand, usually they're higher than real value.