what appraisers look for - Posted by grant houston

Real Estate Investing Industrial
1

Posted by Brent_IL on August 11, 2003 at 12:05:20:

I apologize for the ?made to order? remark. I don’t believe that MAI’s have less integrity than most, collectively or as individuals. It isn?t so much that MAI?s can be bought for a price. I believe that most professionals will seek out information that will put their clients in the best light. M.D.?s seem to be the exception.

I think this is about the expectations of their clients. Most clients expect to get what they want for their money. I?ve had MAI appraisals that were worth twice as much as I paid for them because of the information contained within. I know of one that I needed for due diligence that contained words that I had used in my cover letter verbatim and I certainly wasn?t unbiased. The MAI still signed-off.

Within his or her field of expertise, professionals will come across the same situations many times. Similar situations promote similar solutions. Especially in the financial fields, the appropriate solution is sometimes glaringly obvious to an expert within a few minutes of considering the problem. It may have taken years of advanced training and experience to make that judgment. A high skill level deserves high compensation. For example, it took one of my lawyers quite a while to understand that I was serious about paying for knowledge and not time. Many times my only questions were, ?Given this situation, can this be done, and if so, how soon,? and ?Can you do it in-house, or do you want to bring someone else on board to assist?? I?ll happily pay the same amount as I would for a 10-page qualified letter of opinion. Because he didn?t believe me at first I was delayed in getting the information I wanted. But, if another client of his was billed $1,000 for 15 minutes they would feel ripped-off. The solution is to elaborate the documentation with bells-and-whistles. It doesn?t add to the product, but it makes the client happy.

I know from my experience and interaction with SFH appraisers that your conclusion about competence is likely correct. After I took the courses, I recall thinking that aside from ethical and documentary procedures, I didn?t know any more about the art of appraising than I did when I had started. I could recognize and fill out work sheets and add and subtract numbers in a column, but I would have been a terrible appraiser. The appraisals that I am truly qualified to make could be done just as accurately by adjusting a broker?s comps by amounts for patching, paint, and carpet. In his first ?No Money Down? book, Robert Allen taught as much about the process as I learned in the required courses.

In my experience, a good SFH appraisal takes much more time and effort than those that order the appraisal are willing to pay for. I imagine that the same qualities that make a good detective would make a good appraiser.

Again, I didn?t intend to offend MAI?s; this is personal experience.

2

what appraisers look for - Posted by grant houston

Posted by grant houston on August 10, 2003 at 18:02:44:

Hello:
I am new to this. I am wanting to invest in real estate and am starting with my residence.

I am getting a refi loan to purchase from the seller. I have been here for over 4 years.

My question…what do appraisers look forw when coming to the house. I talked to one last week and she said she will measure, look at floor coverings and general appearance, no leaks, no holes in the walls. Sounds as if it’s mostly cosmetic. The houses in my neighborhood are highly desirable. Realtors have said that a quick sale of my house would bring 165K and in about 60 days about 175K. No house here that has gone on the market lasted over 50 days.

Any help would be appreciated. Thanks!

Grant Houston

3

Re: what appraisers look for - Posted by Paul Ness, MAI

Posted by Paul Ness, MAI on August 11, 2003 at 07:14:23:

Someone else said “it’s all subjective”. Well, it’s not ALL subjective. First comes expertise in selecting the most relevant comparable sales. Second comes knowing what kind of adjustments to make. Third comes knowing the amount of adjustment to apply. Adjustments can be estimated by using “paired sale” analysis. This is extracting adjustments from the market by isolating as few variables as possible - kind of like solving simultaneous equations or multiple regression. After an appraiser has been in the business for a while and made numerous upon numerous adjustments day-in and day-out in a given market, they get a better handle on the size of the adjustments to make. This is why experience in a particular market is so important when selecting an appraiser. Another person also commented that bank appraisers are told to appraise low or high depending on whether or not the bank wants to make the loan - this points to another important characteristic in selecting an appraiser, and that is integrity. As a bank review appraiser (for commercial loans) I want an appraiser to call it the way he/she sees it, and let the chips fall where they may. Fortunately my employer agrees with that philosophy or I would not be working where I am. All state certified appraisers are required to follow Uniform Standards of Professional Appraisal Practice. If they don’t they can be penalized ranging from a fine to jail time. MAI’s and SRA’s are further required to adhere to a strict code of ethics and if they don’t they can lose their designation.

4

Re: what appraisers look for - Posted by jasonrei

Posted by jasonrei on August 10, 2003 at 20:07:17:

Generally they want square footage and general condition of house (poor, fair, average, good, they will also sometimes note if it is really nice). Their appraisal will have photos. You want the exterior to look nice, helps them justify a high valuation.

The appraiser I use gets 3-4 comparable home sales in the area. He’ll add or subtract for things like differences in sq ft, garage, lot size, general condition, # of rooms, type of AC, etc.

5

Re: what appraisers look for - Posted by Brent_IL

Posted by Brent_IL on August 10, 2003 at 20:06:42:

Appraising is interpretive and, as you said, some is cosmetic. The appraiser looks for recent sales of houses similar to yours. Preferably, within the past 90 days. No house is exactly like another, even with tract homes, so the appraiser will add and subtract a monetary value in categories that differ. These are tangible differences, like square footage, and there are cosmetic differences.

The objective is to standardize the houses to establish a probable range of value. It’s all subjective, but within strict guidelines. Individual appraisers may have individual issues that transcend the goal of accuracy. Bank appraisers may be told to come in low if there is no money to lend, or high if the bank wants to justify making a loan. MAI appraisals, which can cost ten times the cost of a FHA appraisal, can almost be made to order. The current market is the only true determiner of value.

6

Re: question about comps - Posted by MO

Posted by MO on August 10, 2003 at 22:11:08:

Your comment about the appraiser using 3-4 comparable sales raises a question that I have been struggling with - If the sales vary from, for example, $84,000.00 to $114,000.00 (on houses within 1/2 mile, same square footage, year built, BR/BA, etc.), how do I go about determining the comp value for the property that I am interested in? This has come up several times when I ask my realtor to provide the comps on a property. The range in sales price is so great and without knowing what the inside looks like, I don’t feel very confident coming up with an ARV to use. On houses in this price range, $5000 either way is signficant.

7

Re: what appraisers look for - Posted by Paul Ness, MAI

Posted by Paul Ness, MAI on August 11, 2003 at 07:01:38:

MAI appraisals can almost be made to order??? Please explain.

8

Re: question about comps - Posted by jasonrei

Posted by jasonrei on August 11, 2003 at 18:58:27:

Sometimes there really ISN’T a good way of determining a property’s value. I run into that all the time. No good comps, or not enough to feel good about them. Sometimes I “know” a house will fetch $60k after it’s fixed up, but I can’t justify it by comps, so I pass. Sometimes my gut tells me to go ahead anyway.

I recently made an offer on a house that I figured would get $65k after repairs. It had flooded previously, and I had a bunch of comps before and after the flood ranging from $12000 to $28000, with one recent maverick sale being $60k+. I was able to determine that most of the low comps were for REOs. If you can, run a quick search on the comps you came up with and see if the previous owner was a lender. You can probably kick those comps out (but still give them SOME weight).

Might also swing by the other houses you comped and just talk to the owners. Introduce yourself. “Hey, my name is Joe. I’m thinking about buying a house in this neighborhood, and I wanted to see what you thought of the area. Have you lived here long? Your house looks nice, did you upgrade it recently, or did you buy it like that? Values seem to still be pretty low (or high) around here, why do you think that is?” It doesn’t take long and it gives you a better feel for the area, plus it’s kinda nice talking to folks. They might even show you around. Maybe you have time for this, maybe you don’t.

9

Re: what appraisers look for - Posted by Brent_IL

Posted by Brent_IL on August 11, 2003 at 10:02:33:

This is a personal observation only and not to be construed as a negative comment or any kind of a slam against Members of the Appraisal Institute. I don?t want all of the appraisers to jump in to defend their chosen profession. I took the licensing courses required by my state to sit for the exam, so I know the entry level of knowledge needed to be licensed as an appraiser. Not a good appraiser, but a licensed appraiser nonetheless.

Members are highly trained. It would be unusual for a lender to dispute the value given by a MAI appraisal unless they always use their own appraiser. MAI expertise is welcomed in appraisals where it is difficult to establish value. A MAI friend of one of my instructors was hired by the Army to appraise unneeded missile sites to establish resale value. After three years, he was still working on the first one. The lack of comps brought replacement value to the forefront.

Like all experts, Members charge well for their services. A required appraisal that costs $350 when done by a state-licensed appraiser can cost $2,500 if done by an MAI appraiser.

An attorney who is called upon to review one of your deals will find something in the contract to object to because his client expects to get something for the money spent on fees. If the lawyer said, ?Use what you have, it will do,? the client will feel that the lawyer didn?t do his job and he or she has wasted the money spent on legal services. It?s the same thing with estate planners.

Like other professionals, MAI appraisers will make every reasonable effort to give their clients the value they are seeking. There is a direct relationship between the amount paid in appraising fees and the effort put forth to find realistic comparisons to justify a client’s estimate of value.

10

Re: question about comps - Posted by mo

Posted by mo on August 12, 2003 at 19:45:01:

thanks for the feedback!

11

I forgot one more thing - Posted by Paul Ness, MAI

Posted by Paul Ness, MAI on August 11, 2003 at 10:31:26:

It is untrue that “it would be unusual for a lender to dispute the value given by a MAI appraisal”. That may be the case for a small transaction at a small bank, but particularly with larger transactions (those where MAI’s are more often engaged) an MAI appraisal will be scrutinized as closely as anyone.

I think maybe we’re just coming from two different ends of the spectrum of property types. Again, you are absolutely correct that MAI’s would be priced too high for some assignments, and it’s really not worth it when you can get a state certified appraiser to do just as good a job (again on certain assignments) for half the fee.

12

Re: what appraisers look for - Posted by Paul Ness, MAI

Posted by Paul Ness, MAI on August 11, 2003 at 10:23:45:

I understand your comments about pricing and getting a product that is worth the cost. The problem is that appraisals (especially commercial appraisals) are like an iceberg - the report only reveals a portion of the effort and research involved and if all you are looking for is a number that works, then hire whomever will give that to you. Or, if you have a small basic property, then you don’t really need to spend the money for an MAI.

I took issue with your comment that MAI appraisals “can almost be made to order” because it implied MAI’s as a group have particularly less integrity than most. There are bad apples in every basket, but your implication is certainly not the case. Finally, as far as your example of a $350 vs $2,500 fee - that is a bit of an exageration between prices of MAI’s vs non-MAI’s. A $350 commercial appraisal can’t be worth the paper it is written on. In my neck of the woods (as a commercial review appraiser) $2,500 is an average fee for a commerial appraisal. Prices are dictated by the market and if an MAI is competing with a non-MAI on a corner machine shop then they must have a lower fee or they won’t get the job. Conversely, your typical state-certified appraiser would not be competent to appraise old missile silos - fewer qualified appraisers = higher fees. Basic supply and demand. I also agree with your comments regarding the minimum requirements for state certification and the numerous state certified appraisers who are out there doing marginal work. I have concluded the problem in the appraisal industry is not lack of integrity as much as it is a lack of competence.

13

Re: I forgot one more thing - Posted by Brent_IL

Posted by Brent_IL on August 11, 2003 at 10:53:39:

Paul,

Thank you for correcting me.

You’re right that I was looking at it from a SFH perspective. I realized early on that good appraisers work too hard for the money that they are paid.

I have noticed that MAI appraisals are universally accepted, and are almost de rigueur with real estate LP’s or private placements. I?ve used MAI appraisals to establish projected value. I appreciate your insight as a Member. Thanks.

Brent