FHA Appraisal - Should we be worried ???

Condition of the property is certainly part of the equation. Truthfully if the appraisal won't support the value.... then you are over paying and should renegotiate. Why would you want to pay more than the property is worth?

Our contract was accepted at $179,900 with the sellers paying closing costs. We have been looking in this price range for the past few months and nothing at that same price point even compared to this. Most homes at that price still needed a new kitchen or other remodeling - they weren't "move-in ready," as this one is.

We do have a financing contingency in the contract so we can get out and get our earnest money back if the appraisal doesn't come back, because obviously low appraisal = no loan.

RenoLoans said: Condition of the property is certainly part of the equation. Truthfully if the appraisal won't support the value.... then you are over paying and should renegotiate. Why would you want to pay more than the property is worth?A lot of people make the mistake of placing an undue reliance on appraisal values. An appraisal is more art than science. While there are appraisal standards out there, it is actually very, very, very common for two appraisals to reference vastly different amounts and for both of them to be prepared in compliance with appraisal standards. This is because in the course of an appraisal there are often significant judgment calls that must be made and different appraisers can often make them very differently.

This is not to say that appraisals are useless. To the contrary, appraisals can be extremely useful but you have to understand that the amounts referenced there are anything but gospel.

With prices moving like crazy, it can really go either way. The appraiser wants you to buy the house and the bank wants to loan you the money. We recently bought a house and it took a while to close so the bank required a second fha appraisal/inspection. Both appraisers didn't do too much work, one pointed out a concern that was fixed. Both listed comparable like what you find on zillow.com and cyberhomes.com For the loan, both put the "market value" at the purchase price
They know that your loan limit and deposit requirement is based on the purchase price so they usually won't value the property lower (if you are willing to buy it at that price that's what it's worth). If they are lower, you can ask for a re-evaluation from a second appraiser

You should get independent inspection just for peace of mind (or to make a repair list) As for independent true appraisals, they do price in improvements and compareables but the bank appraisals are just required paperwork for the loan packet

lindylady said: then the seller usually lowers the price to the appraisal price because nobody is going to be able to buy it for more the appraisal price.As I mentioned above, it is quite common for two appraisals to reference two very different fair market values.

What has been happening lately in residential real estate, by the way, is that for the past year or so all the lenders have been using appraisal management companies rather than ordering appraisals directly, as they used to do. The goal of this rule was admirable, as in the past it was quite common for lenders to pressure appraisers into giving them values that they needed, so an independent appraisal management company now prevents that from happening.

The problem with this rule is that a lot of appraisal management companies have no experience with local conditions and assign appraisers rather randomly. An appraiser who is not familiar with the area is very likely to provide an appraised value that is quite arbitrary, as it really takes a lot of local knowledge to accurately and fairly appraise real estate. For instance, an appraiser without local knowledge might not realize that parking in certain areas is at enormous premium, so an extra reserved parking spot can easily be worth thousands if not tens of thousands of dollars. On the other hand, if parking is free and plentiful in the area, the appraiser might not realize that having a lot of parking in the subdivision is of rather limited value to potential buyers.

Further, an appraiser not familiar with local traffic patterns might not realize that houses in a certain subdivision sell at a premium because the subdivision's location facilitates particularly easy access to certain areas, while another subdivision nearby is significantly less attractive to potential buyers because it can be very difficult to get in and out of it during traffic.

The list of these things goes on and on. The bottom line is that you should never assume that an appraisal value represents a true fair market value of a property, regardless of whether the value is above or below the sales price.

Too late, 3 question marks means you are all ready worried.

SouthCity63116 said: Our Realtor, with extensive local market knowledge, doesn't seem to think so, but who knows!

I assume you know this, but realtors are motivated to (a) get you to buy at any price, and secondly, (b) get you to buy at a higher rather than lower price, because their commission is generally directly proportional to the price.

SouthCity63116 said: ...I was putzing around on sites this morning and came across Zillow.com, which had an estimate that was significantly (as in tens of thousands of dollars) different than our offer.Zillow as well as all the other public and proprietary valuation systems used by different lenders are often WAY off, particularly when the relevant area is not homogenous.

It should be pretty self evident that if a subdivisions consists of houses that are practically identical to each other and has plenty of recent sales in a fairly tight range, even a blind monkey can arrive at an accurate fair market value. If, on the other hand, you have to make significant adjustments to the comps because the area is not homogenous, you can't replace extensive local knowledge with anything else. It's very difficult, for instance, to come up with an accurate adjustment to a house that you want to use as a comp that might've recently sold for $400K nearby if the house you are buying is selling for $200K because they contain totally different features and would attract very different buyer pools. Likewise, software (or an appraiser without sufficient experience or local knowledge) doesn't know, for instance, whether the house you are purchasing has a brand new roof and high quality structural and aesthetic upgrades or whether it has a 25 year old roof and a leaky basement.

lyd753 said: The appraiser wants you to buy the house and the bank wants to loan you the money.
What? The appraiser doesn't give a shit who buys the house. He gets paid no matter what. The bank also wants to make sure the house is worth the loan amount. If the bank "wants to loan you the money", why would they pay for an appraisal? You make no sense.

They know that your loan limit and deposit requirement is based on the purchase price so they usually won't value the property lower (if you are willing to buy it at that price that's what it's worth).
Wrong. Are you posting from 2006? If the house price is much higher than comps in the area, then the bank won't give you a loan for that amount.

dimsumkid said: I just sold a house in Dec 2009 to a buyer using an FHA loan. I was told if the appraisal came back lower than the selling price, I would have to adjust the selling price downward to the FHA appraisal.This has nothing to do with FHA's and is just the way many sales contracts are written. Assuming that the appraisal contingency is completed properly, if an appraisal comes in lower than the sales price during a specified period, the purchaser has the option to back out. As a practical matter, depending on the reason that the appraisal came in lower, the appraiser could be ordered to re-assess to include some of the features that he failed to take into account the first time, to provide additional comps, etc... It doesn't mean that the end result would necessarily change but there are ways to address appraisal deficiencies if you/your lender know what you are doing.

Also was told if this did happen, the buyer can back out and this FHA price would be stamped on my home for 6 months (property in Chicago,IL), so any buyer that wanted the house would be crazy to offer anything higher than this FHA appraisal.I am assuming that you mean that FHA would keep the appraisal information in its system for 6 months, so that it can be used if another buyer applies for an FHA loan on this property. Non-FHA lenders would not have access to this information, so such an appraisal would not affect buyers applying for a non-FHA loan.

gator2000 said: geo123 said:

What has been happening lately in residential real estate, by the way, is that for the past year or so all the lenders have been using appraisal management companies rather than ordering appraisals directly, as they used to do.

Not true on FHA loans over the past year.You are correct. In September, 2009 FHA clarified that it does not require the use of Appraisal Management Companies but prohibits mortgage brokers and commission based lender staff from ordering appraisals (which is a good thing). A lot of FHA lenders do use appraisal management companies, however.

geo123 said: dimsumkid said: I just sold a house in Dec 2009 to a buyer using an FHA loan. I was told if the appraisal came back lower than the selling price, I would have to adjust the selling price downward to the FHA appraisal.This has nothing to do with FHA's and is just the way many sales contracts are written. Assuming that the appraisal contingency is completed properly, if an appraisal comes in lower than the sales price during a specified period, the purchaser has the option to back out. As a practical matter, depending on the reason that the appraisal came in lower, the appraiser could be ordered to re-assess to include some of the features that he failed to take into account the first time, to provide additional comps, etc... It doesn't mean that the end result would necessarily change but there are ways to address appraisal deficiencies if you/your lender know what you are doing.

Also was told if this did happen, the buyer can back out and this FHA price would be stamped on my home for 6 months (property in Chicago,IL), so any buyer that wanted the house would be crazy to offer anything higher than this FHA appraisal.I am assuming that you mean that FHA would keep the appraisal information in its system for 6 months, so that it can be used if another buyer applies for an FHA loan on this property. Non-FHA lenders would not have access to this information, so such an appraisal would not affect buyers applying for a non-FHA loan.

My agent stated if the FHA appraisal price wasn't met, there wouldn't be a loan, hence, no sale if the price wasn't reduced to the FHA appraisal. Regarding the price in the system for 6 months, I was told any agent can get this information whether it was another FHA or conventional loan.

jamesboy said: geo123 said: Once again, appraisals are more art than science, and blindly relying on appraised values can easily cause you to overpay or to underpay.
News flash...The days of subjectively (or artfully) appraising a home are over. It's all science now.Is it really too much to ask for people to stop creating unequivocal posts on issues that they know nothing about? If you knew even the most rudimentary things about the appraisal process you'd stop creating these asinine posts. As a threshold matter, the value of anything typically cannot be expressed as a fixed and universally applicable number. Instead, the fair market value of an asset typically falls somewhere in a certain range and, depending on your needs and your preferences, different people are willing to purchase the asset as long as the number falls somewhere within that range.

Further, you just can't get an accurate fair market value of a house by "scientifically" plugging in a bunch of numbers into an equation. For instance, there is no "scientific" equation for determining whether something is in "good" or "average" condition. Likewise, there is no scientific equation to decide how much a flat driveway might be worth to a buyer or how much of a discount, if any, a sloping driveway can be expected to attract.

In residential real estate, the most accurate valuation approach is the comparable sales one, which means that you take comparable sales and adjust them for things that are not comparable to the property that you are trying to value. By definition, the adjustments that you make are largely subjective and the greater the adjustments are, the more difficult and subjective the process becomes. As I posted above, for instance, if your comparable sales consist of houses that are considerably more expensive that the subject house, your adjustments are going to be rather imprecise because a $400K house is a very poor comparable when it comes to valuing a $200K house because just about everything about them is going to be different, even if they are located next to each other. Likewise, if you are looking at a small and stable subdivision with very few sales, you just aren't going to have a lot of (or any) comps that you can use.

Shouldn't all of this be pretty self explanatory?

dimsumkid said: My agent stated if the FHA appraisal price wasn't met, there wouldn't be a loanAgain, this has nothing to do with FHA. Every lender will only offer a loan based on the property's appraised value. If you are unable to get the appraised value revised and there is an appraisal contingency, the purchaser can either walk away, negotiate with the seller to adjust the purchase price, or the purchaser can increase the downpayment to account for the lower appraisal.

Regarding the price in the system for 6 months, I was told any agent can get this information whether it was another FHA or conventional loan.Your agent was talking about the FR-4615 Prohibition of Property Flipping in HUD's Single Family Mortgage Insurance Programs, codified in 24 CFR Part 203, which makes it very difficult to use a new appraisal over the next 6 month period. The rule only applies to FHA insured loans.

P.S.
Dimsumkid has now decided to indiscriminately neg all my posts in this thread. Classy move!

I just bought a home with an FHA loan. My Realtor said that it is better it doesn't appraise, then you have a bargaining chip to counter their price. Mine appraised so the sale went through.

crazypalooza said: op: as everyone else said: if you are worried, maybe it wasn't that hot. but on a seperate note, these appraisors "magically" make the numbers work (almost exactly in a creepy way) at least thats my experiance.

That is how mine worked, it was in the ball park of market price.

geo123 said: Shouldn't all of this be pretty self explanatory?
I am a licensed real estate appraiser in two states and the District of Columbia. I will be licensed in a third state very shortly. The art that you speak of is now a federal offense. You should stop posting.

jamesboy said: I am a licensed real estate appraiser in two states and the District of Columbia. I will be licensed in a third state very shortly. The art that you speak of is now a federal offense. You should stop posting.lol, you are so full of it. A person who asserts that residential real estate appraisal business is "all science" and there is no subjectivity involved in the process doesn't know the first thing about appraisals. Once again, there is no scientific basis for deciding whether something is in "good" or "average" condition. There is no scientific equation that can help you determine the precise adjustment that you must make to comps that are, for instance, over 12 months old or are significantly more expensive than the subject property. This is about as axiomatic as things get.

Regardless of the financing (FHA, VA, Tony Sorprano), the market value of the property on the day it was inspected is the market value. The house is worth $X today. Simple.

What really confused me about buyers is that they WANT the home to appraise at the offered price. How about want to pay what it is WORTH and not worring if it appraises or not. Do you really want to pay MORE than the house is worth?

Interior improvement may give a slight increase in value but really all you are doing in lowering the effective age of the home. Every house needs floor coverings and just because you spend $1000 on new carpet in the living room doesn't mean you gain $1000 in equity.

If the homes in your neighborhood are going for $130k and the home you are interested in is going for $179k, this could be an overimprovement. The owner could have overspent on the improvements to the home. What is most important is what YOU like, not what value the improvement will bring. You like to potty on a 24k gold toilet, it won't increase the value of the home but YOU like it.

geo123 said: As geo123 stated before,

The problem with this rule is that a lot of appraisal management companies have no experience with local conditions and assign appraisers rather randomly. An appraiser who is not familiar with the area is very likely to provide an appraised value that is quite arbitrary, as it really takes a lot of local knowledge to accurately and fairly appraise real estate.
I failed to read all the posts before I replied.

This statement is correct except for the bold part. The AMC's do not assign appraisals randomly, they assign by who is the CHEAPEST even if the appraiser is 150 miles away. Geographic competence is a huge problem. Appraisers from out of town without sales data access (especially in non disclosure states) or are NOT paying/active members of the local MLS are doing these assignments because they will do it for half of what a local appraiser with a decade plus experience will charge.

As a Certified Residential Appraiser, I refuse to work for 1982 fees. Next time you get an appraisal, simply ask the appraisers name and you can look up their license information at ASC dot GOV. This will tell you their office address, how long they have been appraising and status. Good info if the appraisal comes out 'funny'... Why did my appraiser drive half way across the state to come to my house?

edit: cant figure out how I messed up the quote thing....