Home Buying in Brea>Question Details

ktong, Home Buyer in

How accurate is an appraisal?

Asked by ktong, Fri Feb 1, 2008

I made and offer for a 4-unit rental about 2 months ago and was accepted. It is now going through escrow. Since then real estate prices had deteriorated even more. How much can I rely on the appraisal of the property to reflect the latest price drop?

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I work in the Yorba Linda Real Estate market, so I can give you some perspective from a Yorba Linda California point of view. An appraisal is generally the amount a lender is willing to accept as security for a loan. They do consider market value, comps, and other economic factors, but all toward the end purpose of the appraisal... to establish how much of a loan the property can be used to secure. The actual value of the property is the amount a ready, willing, and able buyer would pay, but in the absence of the actual buyer, an appraiser has to evaluate how much a buyer would be willing to pay. Here in Yorba Linda California, an appraiser must adjust their valuation based on what buyers are recently paying for similar properties. Additionally, here in Yorba Linda, the appraiser has to anticipate that, according to recent trends, tomorrow's buyers in Yorba Linda California are likely to pay 10% less for similar properties in coming months. With the market in declining, an appraiser has to compensate for the anticipated decline. Most lenders will requrest a review of the appraisal at the end of the escrow period to make sure the appraiser has properly compensated for the adjustments in the market from the time escrow was opened. So an appraisal has to be a snapshot of what buyers are paying for similar properties, adjusted for current market trends. Ultimately, it is the market that determines value and an appraisal has to be an estimate of what the market is paying and will potentially pay in upcoming months. Here in Yorba Linda California, that sometimes means the purchase price must be adjusted when the appraisal comes in lower than the purchase price. You can find more information about Yorba Linda Real Estate values on my web site at http://www.PeltonTeam.com. If you are interested in property valuations in other parts of Orange County California, you can find those there as well.
Web Reference: http://www.PeltonTeam.com
0 votes Thank Flag Link Sat Feb 2, 2008
Sorry to go off topic but shouldn't you be concerned about a possible exit strategy if the market is deteriorating ?
1 vote Thank Flag Link Mon Feb 4, 2008
Income properties have more of a direct tie to rents than that of single family residences. The location of the units and competition are more important to the appraisal. If you are concerned you can always as for another appraisal or get a brokers professional opinion.
0 votes Thank Flag Link Tue Feb 16, 2010
It really depends on the appraiser... The new HVCC guidlines are making it hard for brokers and realtors to say anything. If the appraiser is good he will walk the property and take down plenty of notes, if the appraiser is sloppy or bad he will do a quick drive by.
0 votes Thank Flag Link Wed Nov 11, 2009
How much can I rely on the appraisal of the property to reflect the latest price drop?

The market price is the day the appraisal was done, that is the value or opion of the property. It really comes down to the appraiser, the data or recent sales in the market area.
0 votes Thank Flag Link Sat Sep 26, 2009
There are 3 different approaches of appraisals. 1) comps, 2) Income Approach & 3) Replacement Value
Properties upto 4 - units are usually appraised using comps.
Income approach is used for income producing properties incl multi family, commercial etc. The values are determined by net income devided by
normal (comparable) Cap Rate for similar properties. Cap Rate = value / net income.
The Replacement value is cost of replacing the (new)property less the deprecition for the age of the property.

In your case the comps is general value, varied by income approach.
0 votes Thank Flag Link Tue Nov 18, 2008
Some sellers discover when they list for sale that their home isn't worth as much as it was
when they refinanced. Several factors can account for this discrepancy. A refinance appraisal, like a purchase appraisal, should reflect the current market value of a property. But, its accuracy can only be measured in terms of a specific time. Real estate markets are continually changing. If there are more buyers looking for properties like yours today than there were when you refinanced, your property could be worth more now than it was then. However, if there are more properties on the market today, your property could be worth less now than it was then. In addition to current supply and demand factors, actual property values may have appreciated or depreciated since the property was last appraised. An appraisal done as recently as three months ago could be out-of-date in a volatile market place where values are changing quickly. There is also an element of subjectivity in the appraisal process. Refinance appraisals can be more subjective than purchase loan appraisals, so they are more subject to error. When a property sells, the purchase price usually establishes the market value. Market value is the price a willing and knowledgeable buyer will pay for a property. With a refinance appraisal, the critical "willing buyer" component of the valuation equation is missing. Even so, it's relatively easy to establish an accurate value for a property located in a tract development, where plenty of similar properties have recently sold. In neighborhoods with a lot of variability in the housing stock, there's more guesswork involved. Without a purchase price, it's difficult to pinpoint
a market value precisely. There's usually a range of value. Some appraisers tend to appraise on the high side; others are more conservative.appraising the same property and using the same comparable sales data come up with different valuations. REFINANCER'S TIP: The mortgage broker who arranges the borrower's refinance can influence the outcome of the appraisal. Borrowers usually refinance to lower the interest rate on their mortgage, to consolidate debts, or to generate cash. The mortgage amount will need to be a certain size to make refinancing worthwhile. If the property appraises high enough to support the required loan amount, the borrowers refinance. If the property appraises too low, they don't refinance. Lenders have loan-to-value (called LTV) requirements. Most lenders won't lend more than 75 to 80 percent on a refinance. If the lender has an 80 percent LTV requirement and you need a $550,000 mortgage to make refinancing worthwhile, your home will have to appraise for $687,500 ($550,000 divided by .80). Often mortgage brokers check with appraisers before they order the appraisal to see if the property is likely to appraise for a certain price. If the looks like the appraisal could come in low, the mortgage broker might hire an appraiser who has a reputation for appraising on the high side. This will maximize the chances of the loan being approved: the borrowers get the loan they want and the mortgage broker gets paid. It's risky to push the appraisal to an artificially high price, particularly if the borrower is overleveraged. A high appraisal may enable the borrowers to pull cash out of their property. But if
prices decline, the homeowners may end up selling for less than the amount owed on their mortgage.

THE CLOSING: A high appraisal can leave sellers with a false impression of their property's value. Only the market can determine what a buyer will actually pay.
0 votes Thank Flag Link Sat Nov 15, 2008
The simple truth is you can’t. A bank ordered appraisal is designed to determine a property’s market value as of the date of the appraiser’s inspection. You can solve your problem by personally obtaining the services of a qualified appraiser to perform an appraisal based on the property’s estimated future value; investors do it all the time. If you have any questions feel free to contact me. Good Luck
Web Reference: http://SummitAppraisers.com
0 votes Thank Flag Link Fri Sep 12, 2008
The appraisal is good based upon the date of the inspection. It is considered the fair market value at that time. As an example, I am also a state licensed appraiser and if I went out there today the value would be based on todays date.

It sounds like you have been in this process for some time. Depending on the escrow terms and your concern with the value you may have some recourse. Any other questions let me know, I'd be happy to assist you
Web Reference: http://www.centuryside.com
0 votes Thank Flag Link Fri Sep 12, 2008
You can't unless they reaapraise it. It is in thebank self interest to do so as they are carrying the loan with the property as lien.
See all OC properties below


Videos at this site on related matters

0 votes Thank Flag Link Thu Sep 11, 2008
Your best solution is to call a licensed appraiser either pay for a new appraisal if you already have one or find out what percentage of decline the rental unit may have dropped and maybe re-negotiate!
0 votes Thank Flag Link Tue Jul 22, 2008
I am a licensed appraiser and give you the true story.... feel free to call or email your question on a property.
Web Reference: http://www.centuryside.com
0 votes Thank Flag Link Tue Jul 22, 2008
If you still want the property, but not at the price you have already agreed to from two months ago, consider re-negotiating with the seller now. Figure out how much the market has dropped and how much you think it will continue to drop and see if you two are in agreement.

Chances are , if you are working with a reputable appraiser, the appraiser has taken current market conditions into account when putting together your appraisal. The lender won't fund a loan if the appraisal doesn't "come in".

Click the Web References below to see a post I just did on price per square footage from 2006-2007 in Orange County.
0 votes Thank Flag Link Tue Feb 5, 2008
Do you have a real estate attorney that is reviewing all the documentation..and if not, have you read all the paperwork? Does the paperwork provide you with a "re-assesment" for long closing times??
I would actually talk to the county assesors office (ask for the most senior assesor) and have a discussion about your situation. I realize that county assesments have 3/5/6 year cycles depending on the area of the country..but the fact remains that they hold the BIG PICTURE of the area you are investing in.and you need some reference point for your situation. The assesors office should have the up to date sold data. Should you base your investment on a "24 hour window" of what the property is worth in today's market?
Best of luck -- keep asking questions,
0 votes Thank Flag Link Fri Feb 1, 2008
Your lender will usually conduct an appraisal when you open escrow to see if the rental you are looking at is, in fact, worth the price you offered. If it is over their appraisal, they won't fund the loan. They won't fund more than what their collateral is worth. This isn't a bad thing. You may get the rental for less than your offer. Rentals are a little tricky to appraise though. Its not just the condition of the market and property, but also is influenced by the rental net income, its return on investment, and other such issues. If you're in the OC, rent increases, on average, 5.5% throughout the county. San Diego is about 5%, LA can get over 6% rent increase in certain locations. Back more to your question, if you're concerned, have your lender appraise it. It could be small out of pocket for a lot saved in the future.
0 votes Thank Flag Link Fri Feb 1, 2008
An appraisal is only accurate on the day it was preformed. Market conditions change daily. It's also important to remember that an appraisal is one professional's OPINION of value at that time. The market ultimately determines a property's worth when a buyer and seller come together on price.

In a slower market there may be limited multi-family sales for comparison. If new comparable sales have sold, gone under contract or even been listed since the time of your appraisal, the value conclusion would likely change to reflect the new activity. If no market activity of multi-family properties has occured in the past couple of months, you may benefit from studying statistics that track the decline in sales prices in your "deteriorating" market. Apply the percentage of decline in value (proven through other closed sales in the immediate area from the effective date of the appraisal through today) to the appraised value of your property for a general idea of updated value.

The best thing to remember in a declining market is that there is no way to predict the exact point at which things will turn in an increasing value direction...but you can be assured that it will happen. Don't spend time experiencing Buyer's Remorse. One consistant and proven way to accumulate wealth over the long haul is through home ownership!
Web Reference: http://www.carlascoast.com
0 votes Thank Flag Link Fri Feb 1, 2008
If you are leveraging your purchase by borrowing money, your lender will order the appraisal. The entire reason for lender appraisal on a purchase is to determine the risk the lender is taking in lending you the funds to purchase.
If the property isn't worth the purchase price in accordance with the terms of your loan program, the property will not appraise out.
0 votes Thank Flag Link Fri Feb 1, 2008
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