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March 13, 2007
Appraisal is an Exact Science
Today we gathered about to learn about the topic I’ve already mentioned as being one of my favorites, Appraising!
Our instructor began by stating that any property bought through financing will require an appraisal, which range in price from $250 to $500 for residential properties, to much more for larger properties.
According to our instructor, appraisers are monitored closely, and he warned that some time ago several hundred appraisers lost their licenses for giving appraisals that were too high. It would appear that this has led to appraisers being overly conservative, as they really cannot get in trouble for appraising too low, only too high.
He admitted that many agents pressure appraisers to raise the appraisals to get a home appraised for more in order to save a deal. Investors obviously, want their home to appraise for a huge amount to allow them to get cash back in either a refinance or in a first mortgage.
Our instructor then shared a story about a home he recently sold where he had two appraisals done, which he felt were both honest, even though they varied by more than $100,000. As you can see, this is definitely an exact science.
You are paying an appraiser to give you a guess which will be different every time. Pickup dollar bill. Open lighter. Light bill. Repeat 500 times. An appraisal is sadly, a necessary waste of money.
When an appraiser does an appraisal, he or she is required to do using three different approaches. The sales comparison approach, the cost approach, and finally the income approach.
Generally speaking in Utah, state law governs appraisals, with federal guidelines only applying to commercial property over $1 million, and homes over $250,000 purchased under federal programs such as FHA Loans.
I ask, if state law governs appraisals, then WHY do they vary so much depending on the appraiser used? Better yet, WHY won’t lenders allow buyers to choose their own appraiser in most cases. WHY do lenders require that you PAY for a bank appraiser to do the appraisal?
Real Estate Agents do their own appraisals, known as Competitive Market Analysis (CMA). These ARE not recognized by most financing companies, but can be useful when lobbying for lower property taxes. A CMA is simply a comparison between the property and other ones which recently sold in order to estimate what the home could potentially sell for.
“Lets assume you’re on floor time”, our instructor continued, “and get a call from someone looking for an agent to tell them what their home could sell for. Now realize, this person has probably called several other agents already, probably asking the same thing. (A few in the class cringe) Nothing wrong with that, this is America, and we live by competition.
One thing you want to make sure, is whether you’re the first agent in or the last agent in, you want to make sure you’re the last agent in.”
Now when they call, you want to get as much information as possible over the phone from them about their home, and it’s size, bedrooms, etc.
“Now in the old days, it used to take several days to do a listing appointment. Technology has changed that.” Oh blessed technology.
“Now if you’re the first person in, how do you make sure you’re the last person in?” he asked.
“Give them a number?” a woman in the front responded meekly.
“Well you’ll do that, but it’s going to depend on your marketing program, your professional appearance. You need to convince them to let you list it. Now if they choose you, suggest that you’ll call the other agents for them and cancel the appointments for them. Now I’ve had that done to me, and I’ve done it to others so I know how it feels to have an appointment cancelled on you.”
Our instructor then showed us a hypothetical CMA he had prepared for this class. He showed it to us, and explained how in just a few moments the computer put the whole thing together.
He explained how by varying the number of comparable you have the computer find, you can manipulate the price however you like. One person in the class asked “can the computer do everything for us”
He responded by warning “Now computers are kind of dumb. They can’t do it all on their own. You need to keep things like distance to a school in mind, etc.”
“Things are a lot easier though, it’s really really easy to do a CMA”
We were told that many appraisers work in the same way by using the MLS to pull comparables.
A good agent we were told, can do an appraisal as good as a appraiser, but banks won’t accept them.
Apparently guessing isn’t that hard to do. Too bad computers are too dumb to guess.
We continued learning the usefulness of having an appraisal in Part 2
read comments (2)
March 15th, 2007 at 5:49 pm
It’s amazing that two appraisals could have a 100k difference. I knew you could fudge a little, but, shesh.
March 21st, 2007 at 9:33 pm
[…] He got right to business, by handing out his business card to the class. I have already shared my opinion of appraisers in other lessons, so I have become rather skeptical when it comes to appraisers. That said, I was […]