Why Most Purchase Appraisals SHOULD come in Just Above the Purchase Price

How many times have you had this comment from someone who knows relatively little about the appraisal process, “I am not so sure about you appraisers.  Seems like every time there is a purchase transaction needing an appraisal, you come in just above the  purchase price.  If the house is selling for $200,000, you come in at $202,000.  If it is selling for $450,000, you come in at $460,000.  Seems a little rigged to me.”  Ever had a client get really upset when you asked to see the purchase contract before you begin working on the appraisal?  “Well, I don’t want you knowing what the purchase price is.  How can you be unbiased and give me an honest appraisal if you know what they are buying it for?”

To the ignorant (and I mean that in the most gentle of ways), these are legitimate questions. To a trained real estate appraiser however, looking at and even analyzing the contract in detail as part of the appraisal process is necessary in order to complete a credible report.  In fact, the Uniform Standards of Professional Appraisal Practice (USPAP) REQUIRES that we do (Standards Rule 1-5a). Why?  To answer that question, let’s step back from the trees for a view of the forest for just a minute.  What is an appraisal?  In layman’s terms, an appraisal is an opinion of value by a qualified professional supported by market data. That is all fine and dandy…if you have support in the market.  Now, some appraisers work in metro areas where support for the market is easier.  I (and many others like me) work in a more rural market where finding true ‘comps’ are sometimes like finding Big Foot in aisle 13 at the local grocery store.  It is times like this that we appraisers have no choice but to just do the best we can with what little we have to work with.

In a refinance transaction (or a foreclosure, or a divorce settlement, or a tax appeal, etc.) you have one less luxury to work with than you do with a purchase.  With a purchase, you have the best comparable available.  This comp has the same location as your subject.  This comp has the same year built, effective age, square footage, amenities, and condition as your subject.  This comp is exactly like your subject BECAUSE IT IS YOUR SUBJECT!!!  Let me put it another way.  When appraising for a purchase, sometimes the best indicator of value is what a willing seller and a willing buyer have already agreed to sell/pay in an open and free market.  Why shouldn’t this be considered?  In fact, why shouldn’t it be relied upon QUITE heavily?

Now, don’t read what I didn’t write.  I am not saying that it should be your ONLY consideration of value.  If it were, why would the lender need an appraisal at all?  Why shouldn’t Bob’s Bank of the Burbs say, “Hey, we got a willing buyer and a willing seller.  Here is the purchase price, so that will be our loan amount.”  There is a very good reason the bank (and potential buyer) pay upwards of $3-500 to an appraiser.  Both the buyer and the lender want to know that the real estate being bought and mortgaged is actually worth the price that was agreed upon in the contract.  That means…sometimes it isn’t.

Let me give you a recent example.  In a recreational area not far from where I live, I was recently engaged to complete an appraisal for a purchase.  The inspection was completed and the process of finding and adjusting comparables was commenced.  Though the purchase price was $370,000, I could find support for no more than $320,000.  The comps were good.  The adjustments were within normal guidelines, and there was no reason to believe that my analysis was flawed.  Therefore, I turned in the appraisal with a value of $320,000.

The expected call from the real estate agent came a day later.  You can imagine how that played out.  Nevertheless, when I asked him if he could provide me with any other comparable to support the purchase price, his answer was not surprising.  “You used the only three sales available.”  It was tough to not let the smirk on my face turn into a audible laugh.  (Side note:  When dealing with a professional with whom you may care about a future relationship, do not laugh at them.  Just don’t).

Vindication came a week later.  I was invited back to the same community and to the same subdivision.  This time, the home was slightly larger, but otherwise identical to the first one in every way.  Same condition.  Same view.  Virtually the same amenities.  Purchase price?  $335,000.  My appraisal came in at $343,000.  Law of Substitution come to mind anyone?  Now, how would I have felt if I had done the unethical thing with the first deal and “made it work?”  As it was, the amended purchase contract for the first home came over a week later for $320,000.  Saving a buyer from a $50,000 mistake helped me sleep better at night. As an aside, ‘coming in low’ on a purchase appraisal does not always kill the deal.  Rather, it often allows the two parties to renegotiate.  That can only be a positive thing.

Again, an appraisal is not a fact.  It is an OPINION of value.  Of course, being a qualified professional and using accurate market data makes it more reliable than Uncle Leroy stating his opinion of what your trailer house is worth around the Thanksgiving table, but it is still not an exact science.  Because it is not as easy as 2+2=4, there is room for interpretation.  Have any two appraisers look at and value the same property and, though they will be analyzing the same market data, they will not typically agree on value.  That is where the ‘opinion’ portion comes in.

You all remember the bell curve from high school, right?  “Wasn’t that one one invented by Alexander Graham?,” you ask.  Um, no.  The curve is a way to show deviation in statistical sampling.  Because an appraisal is derived from statistical samplings, the curve applies.   Though an appraisal is typically reported as an exact number, no appraiser (who is honest) will bet their life that the property appraised will sell for that price-no more and no less.  If a home appraises at $100,000, does that mean it would not sell for $95,000 or $105,000?  Of course not.  Does it mean it will not likely sell for $150,000?  Probably.  But, at what point does the likely selling price become unlikely?  $110,000?  $112,000?  $112,300?  In a bell curve, that number is the point in which the most likely price falls outside the first standard deviation-or the grey area.  Now, try to keep up.  The bottom line is, an appraisal is more accurately reported as a range rather than an exact number.  Frankly, giving an exact number is (IMHO) misleading, though there is not a bank in the country who would accept a range for most transactions.  

The exception to the grey area rule is homes that are nearly identical.  Let’s take a townhouse as an example.  If I were appraising a townhouse where the contract said the sales price was $110,000, but there were three sales of identical townhouses in the same complex that had all sold for $108,000 in the past 3 months, I would have a hard time supporting the value (even though it is well within a 2% spread.  Unless the market was rising quickly or there were other considerations that could be analyzed, I am not going to ‘hit value’ on that appraisal.  A real estate agent might cry, “It’s just $2,000! Can’t you make it work?,” but my ethics would cry louder that I cannot.

WARNING TO APPRAISERS:  Doing the right thing when it comes to honestly deriving value can appear to hurt your appraisal practice in the short term.  It will, in the long run however, be the only thing that will keep you viable and thriving.  It is a fact of life that not all real estate agents are honest.  Most are.  Some however, rather than wanting what is best for their client, are only looking at whether or not THIS deal is going to close.  A pesky (otherwise know as an ‘ethical’) appraiser can only be a hindrance to them. Some will even go to extreme lengths to make sure “you never do another appraisal in my town again!”  About 95% of my appraisals for purchases come in at or above purchase prince (for the very reasons outlined in this article).  However, the 5% that do not can be a headache.  Let’s just say one or two deals that ‘do not go through’ because of that ‘low ball appraiser,’ can cause some turmoil and hurdle jumping.  For some reason one deal that ‘goes bad’ for some agents somehow translates into, ‘That appraiser always comes in low.’  Weird, but true.  Remember however, doing the right thing is always the right thing.  In the end, I think all professionals would rather that the transaction be on the up and up all the way around.

There is need for a sidebar here:  If you are a real estate agent and are reading this, you may be screaming at the article, “Okay, if you are not able to support value, why don’t you pick up the phone and call me?  I can show you how to come in at value!”  First of all, I used to make that call every time the value looked to be coming in lower than sales price.  I can count on one hand the number of times the call was helpful and information was shared that helped me see the prospect in a different light.  Secondly-and most importantly-federal laws that have been passed since the ‘housing crisis of 2008’ have significantly tied the hands of the appraiser in their abilities to pick up the phone and talk with anyone about value.  It is nearly impossible anymore. We appraisers are not trying to be rude, we are just trying to retain our license.

When I first began as an appraiser, I had to decide whether or not I would appraise in an honest and ethical manner, or try to fit into the ‘Good ‘Ol Boys Network’ and play the silly little games that some play in order to stay ‘liked’ by those in power positions. I decided then that the most important Power in my life was not a banker, real estate agent, or any other professional.  I have made a few people angry over the years (and even ended up on more than a few ‘black lists’) as a consequence of that decision.  And yet, our firm still does more business than our peers.  There is something to be said about running an honest business and the blessings that come in spite of the challenges.

One of those challenges, interestingly enough, is trying to explain to those not familiar with the appraisal process why a HUGE majority of appraisals DO come in at or just above the purchase price.  In my case, that is about 95 out of 100.  Nationally, the numbers are a consistent 88%-91% (“Red Herring Du Jour – Low Appraisals” By: Joan TricePosted on Appraisalbuzz.com Wednesday, August 24, 2011).  That means only 1 out of every 10 purchase appraisals comes in below the agreed upon sales price.  In other words, a super majority are coming it at or above the purchase price! Though it may smell a bit fishy, it actually makes complete sense…if you understand the appraisal process as explained above.

Here’s where the problems start.  Most real estate appraisers are good and ethical, but there are far too many appraisers that care more about their professional relationship with the real estate agents in town or their clients to do the right thing when the right thing requires the appraisal to come in below the agreed upon contract.  In other words, they may not feel like the data supports it, but they will ‘rubber stamp’ the deals so as not to make anyone upset.  In my humble opinion, by doing so, they do a huge disfavor to themselves, the bank, the borrower, the market, and yes….even the real estate agents (listing and selling).  Hear me out.  No one wants to see an agent (who has worked very hard to put the deal together) lose their commission, but it may be the best thing that can happen for all the involved parties.  As a potential buyer, wouldn’t you want to know if the purchase you are attempting is going to cause you to immediately be upside down in the market?  If you are emotionally tied to the property, there are still other options to secure the purchase.  Do you really want to get into a long-term loan and not be able to refinance (or resell) a year after the purchase because you are upside down (even if the market stayed steady)?  From the bank’s perspective, you would certainly want to know what the true value of the collateral is.  That is why you hired the professional appraiser in the first place, right?  Now, as a real estate agent, you are an advocate for your client.  If you are the selling agent, it would be reasonable (though you may lose this one commission), that your highest aspiration would be to protect your client from making a grave error.  Even as a listing agent, your reputation is on the line.  Most would rather be known as honest rather than “the agent who will do whatever it takes to close a deal.”

Remember (lean in a little as this is important), sometimes the appraiser’s results protect the buyer.  Furthermore, appraising a property has, on many occasions, allowed the two parties to come back to the negotiating table and mutually agree to buy/sell based on a price that is more suited to the current market.  In other words, because an appraiser was honest and did the right thing, the transaction was a better fit for all parties involved.

Of course, the purpose of this article is not to explain why or how appraisals come in below the agreed upon purchase price at times.  As the title says, most purchase appraisals should (and do) come in just above the purchase price.  The dynamics of the market ensure that this is true.  To my fellow appraisers, do not be embarrassed or chagrined next time someone asks why appraisers ‘always come in just above the purchase price.’  Take the opportunity to educate them and explain why this is.  Better yet, send them a copy of this article and save your breath.

Now, go create some value!

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Dustin Harris is a multi-business owner, but he made his fortune as a self-employed, residential real estate appraiser. He has been appraising for nearly two decades. He is the owner and President of Appraisal Precision and Consulting Group, Inc., and is a popular author, speaker and mentor. He owns and operates The Appraiser Coach (www.theappraisercoach.com) where he personally consults and mentors other appraisers helping them to also run successful appraisal companies and increase their net worth.  He is also the Founder and President of Your Appraisal Office (www.yourappraisaloffice.com) which implements some of the systems he has developed to help lower costs and free up time for real estate business owners.   He and his wife reside in Idaho with their four children. This article may be reproduced and distributed only in its entirety without permission from the author.

118 Comments on “Why Most Purchase Appraisals SHOULD come in Just Above the Purchase Price”

  1. This article is such complete and utter crap. In what other appraisal business does the appraiser get to know the purchase price of an item before appraising it? When most items are appraised, the item hasn’t even been sold yet, and the appraiser makes the valuation determined on market factors alone, which should be the exact same for a home appraisal. No, you say? Then please explain why if you are ABOUT to sell your home, or even if on a whim, you want to get your house appraised, by a real estate appraiser, you are able to do so and get the EXACT SAME appraisal report The only difference? The appraiser has no choice but the appraise the home fairly since there is no purchase price to try to meet. If you honestly think that isn’t fishy/scam/should be illegal, you are seriously out of your mind.

    But wait, you say, but Matt, the poor little appraiser needs to know if there are items in the sale contract that need to be added/subtracted from the appraised value? Great, you can still do that! You can still NOT KNOW the purchase price of the home, and add/subtract those values from a TRUE unbiased market appraisal. There is absolutely NO reason an appraiser should know the purchase price of the home – NONE AT ALL. In fact, some states, if not already, are trying to get a law passed where appraisers DO NOT know the purchase price.

    But Matt, somebody is willing to pay 1,000,000 for that house that is worth 100,000 – shouldn’t that be considered? Good luck with that because the real reason the house should be appraised CORRECTLY, based off of other homes in the area, is in case the buyer walks out on the home, and the Bank is stuck with it. Yes, a buyer might be stupid enough to pay 10X more for a house, but if/when that buyer decided to stop making payments, the Bank then is stuck with that house, and THAT is why the purchase price of the current home being sold should NOT be taken into consideration. Of course, I also think there should be room for price increases, in a thriving market, where homes should be able to be appraised within 5%, for example, higher than the comparables. Appraisers helped get us into this real estate mess (I know, you don’t believe that for a second), by grossly overpricing homes and jumping values from house to house at wild percentages. If a house comes in appraised for 50% more, then the appraiser should be forced to explain WHY, and that portion should be heavily regulated.

    Finally, I do agree and realize that the FHA, for example, requires appraisers get the full contract and see the price. That doesn’t mean it is right, and your article blatantly states that it is good for an appraiser and those who think otherwise are ignorant, which is ludicrous. Anybody with half a brain should easily be able to understand why an appraiser should never see the purchase price of a home. Again, I go back to my prior example of before a house is sold, you can get your home appraised, which is still based off recent comparables, except there is NO price to meet/exceed to bias the report.

    Good Day.

      1. What kind of name is “Matt an appraiser say”?! -. must be another incompetent appraiser making useless comment with no rational support.

      2. So here is a question around appraisers and appraisals. I have a scenario where I am selling my home and the appraisal is coming in 2.5 % below sales price. In looking at CRS data od 15 homes sold in the area the average is 104.75 per sq foot with like amenities lot size and age . Ours came in at $100.70 per sq ft. The appraiser commented to the listing agent that if they did not know the year the home was built it they would swear it was near new…Very well maintained and great updates were made. We listed our home looking for 102.80 per sq ft. The agent has asked for an appeal as we fill that the appraiser not living or knowing the school zone and using comps for that zone might be unfair. A few blocks away the school zone changes to a less desirable school should that be considered?m

    1. Good article, especially about doing right is always right, and the most important Power in life. In 28 years of appraising properties, I’m sure I’ve lost almost as many clients as I’ve gained because of not hitting a value or showing the hole in the roof, etc. But the clients I have now truly want honest opinions. I feel like a professional providing value, and not a rubber stamper.

    2. Dustin – An interesting and enlightening article but I failed to see where you explained why the appraised value should come in ‘higher’ (just above) than the agreed upon sales price. You made a good argument for using the contract price as an additional piece of data but wouldn’t you discount any seller paid concessions that might be in the contract? For example, an agreed upon sale for $250,000 with the seller contributing $3,000 towards the buyer’s closing costs (or fees that FHA/VA prohibits the buyer from paying). Wouldn’t the agreed upon sales price be $247,000 since the seller is essentially handing the buyer back $3,000 of the $250,000 contract price? I don’t see evidence in your article as to why it should be “just above” sales price. Thank you for insight.

    3. Hey Matt
      If you’re talking about “utter crap,” you’re barking up the wrong _ss. I’m an appraiser and don’t care if I see or don’t see a copy of the contract or sales agreement. If it really bothers you, you should right a letter to the powers that be and request a change to USPAP and any and all agencies and government institutions that require an appraiser to ask for and review a copy of such a contract or sales agreement. Tell them what you think. Most good appraisers don’t give an “utter crap” about the contract or sales agreement as they can render a fair and professional opinion of value without one.

      1. Howard, with that being said – do you agree with Matt that appraisers should not know the purchase price??

        I totally agree with Matt that it is very suspicious the appraisals would always come in slightly above the purchase price!… WHY NOT 50/50??… a bell curve would suggest 50% above and 50% below the contract price!!

        1. It should never be 50/50. The majority of cases should be at or above the sale price even without the appraiser knowing the sale value. The buyer and seller make the original agreement in the open market and so they are aware of the comps which gives them justification for the price. The appraisers only job is to do a reality check for them and the banks.

    4. I was suspicious also went our recent purchased home was appraised for same price of contract price. To me this meant one of two things, it was rubber stamped and comps were picked to match or we were that good in determining selling price on our own. We found the home before our agent, as we felt good price is the best feature of a home. Since I didn’t feel I could call the appraiser, as the seller, I decided to learn more about the process of appraising. I decided to take the online appraisal certification courses as a side hobby and hopefully prove or improve my skills in future real estate transactions.
      Side note, other homes were sold about 10k lower in the area and they were nicer with having more sq and a view…so yes I do feel a little cheated but want to learn from the experience as I doubt we could have avoided an unethical appraiser.

      1. Clarification. .. a few typos….
        ***I was suspicious also WHEN our recent***
        ***since I felt I couldn’t call the appraiser, as the BUYER, I decided to learn more about*****
        Sorry.

        1. Offering grammar advice to someone’s content without having any input to the content is just poor form. It means you have nothing to contribute to the conversation besides trying to feel superior to someone.

      2. I just wanted to point out that for the last two years I have searched and compared homes in a certain area and just when I think I have a good grasp of the valuations one house will throw you a curve ball. Valuations are far more specific as to include everything from the home itself to the terrain whether or not there is foliage in the area the view and what services are offered in the area. It is exhausting to say the least. I recently purchased and was surprised the appraisal came in at the purchase price. I was suspicious because I believe it should have come in quite a bit higher but I still believe I got a good deal because the house and price is fair to me. I don’t want amenities coveted by some. I prefer the small town life and I also prefer contrary to others a more low maintenance yard. My view is spectacular to me but apparently not to the appraiser. Who knew. In 10 years I am certain my home will be worth quite a bit more than I paid for it because I am going to update it. So like the article said part of the appraisal process is opinion. If you are not satisfied with your appraisal it is a way out of your purchase agreement and as the buyer you are free to incur your loss of the inspection and appraisal fee and walk away. Just say’n

    5. Matt, what makes YOU think that ANY other appraisal ‘discipline’ is doing it correctly? CPAs? Jewelers that guarantee your gem will appraise for double what you paid for it? Car auctioneers? Art appraisers (again, auctioneers)?

      Aside from which, the article’s PRIMARY inference is one I have found to be true in over 28 year s as an appraiser; and 6 more as an agent.

      “The real estate market WORKS!” We review contracts to insure they are open market, arms length CASH EQUIVALENT* transactions with no unusual incentives or inducements (in the old days called ‘boot’). In GENERAAL buyers and sellers KNOW what the property is worth. They don’t always tell each other, or us, but they know. (*CE or typical financial arrangements comparable thereto).

      I frequently disagree with the author, but in this case he’s right on the money….(Except for the 108K comps and the 110k Sale). It is his own case in point! He SHOULD have appraised at the sale price with the comment that The final value opinion is based upon the three closed comparable sales AND the current pending sale of the subject itself. For us to pretend we are accurate to amounts greater than 98% is fool hardy. I want to say ‘anytime’ the sale price is within the rounding margin, one should stand up to the underwriter guidelines, explain the circumstances, and logic and reconcile to the market derived price. Maybe not ‘anytime’ but certainly “many times” consideration must be given to whether the market is increasing.

      I am NOT going to defy the market and break a deal for 2%. That’s what competitive listings are for. Unless they are offered for the $108,000 or less, USE THEM and the subject!

      CA General Certified R.E. Appraiser. Former Sr. Appraiser, U.S. Treasury Dept. (IRS/Large Business & International Div.)

      1. Well, at least one appraiser (Mike Ford) seems a bit confused on definitions. There is nothing corrupt about boot; it is a legal term and has a legal foundation. Here’s one good definition:

        “boot”

        (1) Money or other property that is not like-kind and is given to make up the difference in value between two properties exchanged in a like-kind exchange under Section 1031 of the Internal Revenue Code.If a gain would otherwise be recognized on the transaction,except for the intervention of the 1031 vehicle,then gain must be recognized and taxes paid to the extent of the value of the boot. (2) Especially in Texas, it is common among property developers to require some type of boot to show that more than money is involved in their business transactions.

        Example: A seller might agree to sell prime property for $12,000,000, but only if the buyer throws in a particularly handsome bronze statue sitting on his desk.

    6. Matt,
      You are absolutely right. I have done a lot of RE deals in my time, and was a licensed RE agent for years. At one point I decided to take an appraisal course to improve myself. It didn’t take long to realize that the whole game (as taught at a branch of the University of California by a licensed professional appraiser) was to use any kind of factor imaginable to justify a predetermined price. The first time someone started working one of the problems out for the class, I actually laughed because I thought it was a put-on. Then I realized this is actually what is done. So I walked out and forgot about trying to use appraisals as an honest evaluation.

  2. p.s. Sorry for a few of the typos. This massive response was typed in a tiny little text box, which made it very difficult to edit, but nonetheless, my point comes through loud and clear. I truly believe a mentally-challenged monkey could do an appraiser’s job, equally, if not better.

    1. Matt…you say you were a home builder? A monkey truly could pound nails, like you do. You should think of that before you insult appraisers. I know in your line of work you don’t need to think much, but you should try it. I feel bad for you buddy. Somebody really did a number on you. I hope you get the help you need.

    2. At Matt-

      Did Dustin do an appraisal for you that you felt “came in low?” Or are you one of those “agents” he mentions. You have a lot of hate fire without a lot of reasoning. Quite frankly- your emotions undercut your message and make you look like someone who’s got their own agenda….

      Go bark up a different tree. You have contributed nothing of substance but angry words and hate-fire.

    3. “a mentally-challenged monkey could do an appraiser’s job, equally, if not better.”…. Hahahaaa! … as a review appraiser myself, a can certainly understand and appreciate your opinion.

    4. Matt you are obviously a Zillow and AVM fan. Next time you want to sell your house, use them to determine your value.
      Your posts demonstrate that you haven’t a clue as to what is SUPPOSED to go into an appraisal.

  3. Matt:

    Thank you for taking time to write your thoughts. I always welcome challenges to my ideas. Though I can see from an untrained eye why you feel the way you do, it appears that you have embraced the mostly false (yet popular) argument that “appraisers are at fault for this housing crisis.” Though there may be some unscrupulous and shady characters out there, we will need to agree to disagree here. Answering your points one by one I do not believe is necessary as they are already addressed above. I will simply reemphasize the overall point of the article which is that the purchase price should be a PART of the analysis. It should NEVER cause the appraiser to cheat, fudge, or change the facts. You should know that, much to the chagrin of the Realtor, I turned in an appraisal just this past week where, though I had the contract in hand, the value I gave was below the purchase price and the potential buyer walked away. Though, as I have pointed out above, this is an unusual circumstance, it does happen when I believe the purchase price is unsupported. My job is not to rubber-stamp offers. My job is to appraise real estate. Sometimes, my job includes protecting the buyer from making a big mistake.
    I hope you have a better weekend than it appears you are having so far.

    Cheers!

    -Dustin

    1. There is a solution to this. If appraisers think the sales price should be considered, why not allow a preliminary value to be submitted that is derived without knowing the sales price, and a second value that considers the sales price. Then we could determine if the impact of the sales price on the appraisal was within reason or if it is more of a driver or the final figure.

  4. Thanks for the response! I must point out that from what I read from your article, it does seem you are one of the few diamonds in the rough who actually tries to do their job correctly, as long as you truly do practice what you are preaching… 🙂

    I have encountered far too many on the opposite side, however, and even as recently as a year ago when I sold one of my homes, I had the appraiser tell me that it sold for more than what it is worth in that current market, but he’d find a way to make the numbers work.

    On the opposite site, I am currently closing on a house that is worth over $40,000 more than what I purchased it for. The appraisal came back, and it magically only appraised for $12K more than my purchase price. Upon further inspection, I found this was because for every square foot my home was larger than the comps, the appraiser only credited it $10 per square foot, even though the average price per square foot selling in the area is $120. I do realize that it might not be as easy as giving credit for the full $120 per square foot, as the larger a house is, the price per square foot typically starts to go down a bit, but $10 seems awfully low.. 🙂 With that logic, I should be able to get a 3,000 larger square foot house for LESS than $30K more… Does that sound logical? I don’t think so.

    Again, you might be the diamond in the rough here, but out of 5 appraisers I have worked with in the past 4 years, only 1 has provided an accurate appraisal that was truly true to current market conditions. Upon researching the issue, I find boatloads of websites/articles/complaints of much of the same, which I highly doubt it coincidence.

    Anyways, good luck with your appraisals, and please continue to be that one true appraiser who truly does appraise homes for what they are worth, whether it be above or below the purchase price, because again, purchase price should not matter in determining the outcome.. :0

    Thanks again!

    1. Hello Matt. I would like to point out that your reference to the $120 per sf ft in the market and the appraisers adjustment of $10 per sf on the sales grid clearly demonstrates your ignorance towards appraisal methodology and your ability to understand a standard mortgage appraisal. All appraisers reading what I just wrote understand what I just wrote. I am not here to bash your anger and say your are entirely wrong, just want to point out you may not understand as much as you think you do. The issue of this thread is a common one and I am glad Dustin brought it up. Read my more general comment further on if you care to.

    2. Matt, when you get a BAD appraisal, instead of whining about it; pay the costs of a review and send BOTH up to your state appraisal Board. You may still get a bad future bad appraisal, but not from THAT appraiser!

      Some of “us” ARE BAD! So are some doctors, attorneys, Developers, Cops, etc.. Some appraisers make stupid adjustments because that is how they were taught, and they never learned how to do it any other way. Rote adjustment IS a sign of a bad appraiser. IF the market says the cost OR value is $120, then that’s the adjustment…not the mechanical $10 a SF some moron has been doing for the past 30+ years!

      Lastly, purchase price (and terms) DOES / DO matter! It does not drive the value, but it influences it. Example: “Pure” sale $500,000. UPGRADES paid for in cash as additional down payment worth $50,000 (and we’ll assume the market agrees they are worth that much).
      “Comps in tract” range from $450k to $600K. You tell ME where to reconcile at. (Id be at $550K assuming other physical similarities existed). How would I KNOW about the 50k in upgrades that have NOT YET BEEN installed without reviewing the contract?

      As a builder FIND the comps you want used for sales in your tract! You need legal or APN; address, (maybe escrow info IF a brand new tract where all recordings are not yet published); Sale price and terms (recording number petty well guarantees your comp gets considered). Don’t overlooks the sales of the models. Just don’t try to blow smoke up our collective rear ends trying to convince us a bare bones unit is equal in value to that model.

      We go to tracts all the time and get next to NO HELP so we develop our own data from other sources. Not one of which can be as good as the seller involved in the actual sales!

      Spend a couple thousand dollars getting an appraiser to consult with you on marketing support!

  5. I take your point that the selling price should be considered but what if you asked a financial planner what you should do with your retirement funds and he, in turn, asked you what you were doing with it now and then he claimed that your answer was already the perfect answer and you should keep your money there (and then charged you $500)- Would you be happy? There is a chance his opinion was totally independent of yours, but you would never believe that and you would be really bitter walking out of his office. (As bitter as when my appraisal magically came in at $2K over the purchase price even though I essentially stole the house because the owners had died- it didn’t matter that his comparables were all above his appraised values… he fudged this by stating that an old beat up swimming pool was worth 20K in one comparable and another comparable had 2 fireplaces instead of my 1 which was worth $30K. Apparently smaller square footage wasn’t taken into account in the comparables nor was having 1 whole less bedroom — whatever you have to say to make the numbers work, right?

    The problem is I know MY OPINION of what the house is worth, I’m the one who appraised it originally in my decision of offer price. The bank is paying $500 for YOUR OPINION… WHY NOT LET THE BANK FACTOR IN YOUR UNBIASED APPRAISAL WITH MY BIASED APPRAISAL TO MAKE THEIR FINAL DECISION?!?!? If you disagree, and I know you do, please tell me how I can get certified to be an appraiser, because I’ll take $500 to parrot the purchase price back to the bank. I don’t even think it would be unethical because if it is really only 5 in 100 houses that come in under the price, as you say, I’m pretty sure its fairly obvious and it doesn’t require much expertise to notice when someone tries to buy a shack for a million dollars.

    1. You paid a financial planner for his services. And his opinion was similar to yours so you don’t think he should be paid? Wow. That’s logical. And you bought a home that the original owners died therefore you must have gotten a great deal however the appraiser came in at the selling price? I don’t understand your issue? Did the bank not loan on the home because it came into value? Or do you need to feed your ego with a an appraisal that is 50k higher than the purchase price? I am not sure you understand the appraisal process. A purchase appraisal is a tool for the lender and in most cases the homeowner should not even see it. A refinance appraisal and/or general purpose appraisal are different from purchase appraisals because there are different dynamics that are taken into account. Days on market, reason for sale, and yes PURCHASE PRICE.

    2. And another thing, the reason a bank will not pay you $500 for your opinion of value is that YOU ARE NOT AN APPRAISER!!! YOU ARE NOT LIABLE AND YOU CANNOT BE SUED FOR YOUR OPINION…..AN APPRAISER CAN!!!!

    3. Its easy Frank,
      1st go get a four year degree; then complete several hundred hours more of appraisal principles and other related courses & then get somewhere around 2500 hours experience and ‘pay your dues’ in the trenches for five years.
      The exact requirements can be found on your states appraiser Board website. BTW whatever your opinions are SUPPORT them because you will have to submit your work experience log to the state Board and let THEM decide which ones to review.

  6. Thanks for pointing out in your first couple of paragraphs that your services are not needed and appraisers are in a worthless profession. If the value of the home is what someone is willing to pay, why have appraisers at all? If you cannot come up with a value by not having a purchase price to work from then you’re really appraising nothing.

    Art appraisers do not have the luxury of a purchase price before giving a value, why do you need one?

    1. Ryan, you ask why do we need the luxury of knowing the purchase price beforehand? Well, because not everyone buying or selling a home are honest and ethical either. I had a situation where I was appraising a home in which the owner was a few years behind on their property taxes and they were trying to sell their home. Only it was secretly to an extended family member already living in the home with them. In fact, there were several extended family members living in the home. The home was poorly maintained and in need of repairs.

      When I reviewed the purchase contract, I had a gut feeling that something funny was happening because the buyer and seller didn’t fill out the address section of the contract. That and the fact that the home was in contract for about $20,000 higher than the other homes in the area that were similar in condition and appeal. Now $20K might not be much in some areas but when the property is only worth $40K then that is a huge difference. I requested that the contract be filled out completely and when I got the updated agreement, the buyer and seller addresses were both listed as the house that was being purchased. So yes knowing the purchase price is important in the process and so is having all the information.

      Knowing what a buyer is willing to pay and a seller is willing to accept in an arm’s length transaction is important. Let’s say you have a property in contract for $100,000 and without knowing the sale’s price you come in at $99,000 with comparables ranging in value from $90,000 to $110,000. I’m talking sales price before and after adjustments, not $80,000 sales with $20K to $30K in positive adjustments to hit the mark. Would appraising the property $1,000 higher based on the contract price unethical? Not when market value is defined as what a knowledgeable buyer and seller acting in their own best interests are willing to agree upon and you have true comparable sales to support the price.

      You can’t sell anything, whether it be art, houses, cars, or used bubble gum for more than what someone is willing to pay for it and knowing what the market is willing to pay for something is an important component of valuing anything.

    2. Worthless profession you say? Well that is an interesting topic I have thought long and hard about for a long time. To be short, a house or an appraisal is truly worth what someone is willing to pay for it. I think the banks would disagree with your opinion, or at least continue to disagree for the time being. As far as value, which is what this website is all about, I would say a typical mortgage appraisal is a tremendous value when you consider all that goes into the finished product that sells for a measly couple hundred of bucks. This is why I fear not the AVM threat. At the end of the day, you still need someone to go out to the house, collect the data and make conclusions. All that said, the primary need of the appraisal in the first place is not derived from the ignorance of a homes value on the part of the buyer, seller, agent or loan officer. It is because when you let people play with other peoples money, they have a historical habit of taking advantage.

  7. My question is this you have two houses on the same road, both are custom built homes and same square ft.(5,000) Both of these houses are in a new phase in a subdivision. Same floor plan,basically same house just built by different GC’s.
    House #1 has top of the line everything
    House #2 is typical style of a tract builder(cheap)

    So why would appraisal come in the same price per sq ft ?

    Next question how is it possible for a appraisal to come in less than it cost to build a house (materials only). This happen to me on my personal house. I was a custom home builder for years, that was until the banks basically gave us no choice. (I was told by the president of the bank that yes they did get the stimulus money (from me the taxpayer) but were “holding” onto it to make sure they survived through the bad economy. I lost all respect for the bank that we had given lots of money up until that point. Our average monthly interest only payments were never less than 5,000.( over a period of 10 years or so) So that’s 600,000 just in interest.

    Last question.

    On my house to prove a point I hired 3 different appraiser’s and didn’t tell them what I was selling house for. one was 345,000 one 425,000 and one 476,000. How were they that far off from each other. In my area housing market just stopped. Because no one could sell a house for less than the cost of materials and make it too long.

    Didnt see the auto manufacturers “forced” to sell their cars for less than cost to make them ( and they got bail out).

  8. I have to agree with some of the above comments. The only reason I would hire an appraiser as a buyer is to get an unbiased opinion about my offer. I could be way off the mark, the seller could be way off the mark, and I want a third party with no bias to figure out where the true offer should be.

  9. The only people that need to be concerned with an appraisal are the ones who have to borrow a ton of money to buy a house. I am not looking for that buyer. My buyer will be someone who is willing to buy my home for what “they” think it is worth. Except for people who have to be bank approved….why do people still depend on appraisals? Everyone is crying underwater but is still giving importance to appraisals.

    An appraiser told me my covered wrap around deck was equal to a small front porch. He said….”you can only sit in so many chairs at the same time….it doesn’t bring any more value” – Huh? Has he ever thought that homeowners like to invite people over and entertain? And my log cabin tongue and groove black walnut, cedar interior walls were of the same value as drywall. OK.

    1. You are confusing “cost” and “value”……they are not always equal. Why are appraisals still needed? Because banks still loan money to people to buy houses, and they want to know what they are worth. Would you loan your kid $200k to buy a house, if you had not idea what it was worth? I don’t think so….

    2. No BJ, the cedar walls do not have the same value as drywall and the deck is not the same as a porch. These items are wonderful features that when you sell your home will attract buyers and potentially give you an edge over another home they are considering.

      There is value there in those features, however, as an appraiser our job is to make supportable adjustments for differences in key features of the property we are appraising versus the comparable sales. We do this based on market data. Trying to find, prove, and support an adjustment for your log cabin walls would be like trying to adjust and support that adjustment for a yellow house versus a tan house. It can’t be done in the amount of time we have to complete the assignment. Some people might be willing to pay more for a yellow house and others might not. A yellow house might be the deciding factor in a buyer purchasing that home or it might be the reason they don’t buy it.

      I appraised a home in which the homeowner put in gold plated bathroom fixtures. Would you pay more for that house? No. Do the gold fixtures have value to the homeowner who put them in? Yes they do. They have “Value in Use.” This means that certain items may have considerable use value to the current owner but only nominal value to the market.

      As an appraiser, it is our job to help explain things to our clients, homeowners, buyers, and sellers. I hope this helps explain things a little more for you.

  10. We live in a very rural area of a very affluent county. Foreclosures and short sales in the past few years have killed any reliable comps. How can you realistically compare homes if the only comps were sold way below value because of foreclosures, and short sales? We have one comp that actually sold for it’s actual value in the last 6mo witthin our little town, but if the appraiser goes out another 10-20 miles in the same county they will find a hundred. The last appraiser wouldnt do it and so we couldn’t refinance, because there were not enough comps. Now sitting here worried because we are waiting on an appraisal to sell it, although it the contract is 35k less than the last appraisal that was completed in may 2009, after the bubble burst.

    1. That is the reason comps should, in as many cases as possible, be like for like kind. Normal sale for normal, REO for REO, Short for Short, etc. While it is true banks & AMC’s want the comps to be within a limited distance, typically 1 mile or less in an urban area, there is no absolute rule. Even in urban areas comps can be many miles away based on the nature of the market & character of the improvement & site. The problem with many Appraisers today is that they have not learned the logic of money. If a Buyer seeking a particular style & size home would typically consider 2, 3 or more communities & those communities are 5 to 15 miles, or more, apart then that becomes a reasonable distance & comps in those competing communities should be considered. They cannot, however, pass over similar more proximate sales without fully explaining their reasoning in the report so a reader can understand why it was reasonable, and proper, to not consider those more proximate sales. As for the price in the contract I, long before it was a USPAP requirement, required a copy of the purchase contract fully executed with all signatures in place but with the price, loan, etc. numbers blanked out in order to know what, if any, concessions or additional items were included in the transaction. One in LA had a boat slip in a Santa Monica marina included with the sale & the sale price was hugely out of line because of it. That I found out after the report was completed & turned in & the Seller & Buyer both went nova because the bank would not make the loan. It also turned out the slip was not included in the information made available to the bank who would simply have taken the property as full collateral for the loan. Fraud anyone? When a Buyer is asking someone else, mainly the banks, to back them in their purchase they are hat in hand asking for that backing. Why are they so bitter when the bank wants, at least some still do, to know if the value is truly there should the Buyer default on the loan. I, for one, don’t want my tax dollars being used to bail out the banks again for loans that should not have been made. I don’t mean the ones before the crash because no one has, or had, a crystal ball and could out base their values on what had gone before, i mean the ones where personal property is included, an expensive, car, boat, airplane, etc. or just a misrepresentation of the size of the improvement in general. Those I don’t want to pay for. The Appraisal industry is no different than the Medical, Legal, Home Building, etc. industries. Most members of the average group are honest, hard working, people but there are some that simply should not be on the planet. Since we can’t always see them we just have to deal with what is.

      sorry for the length of this but this profession seems to be getting singled out by many people as a scape goat for something that is present in all areas & I just don’t think that is fair or an honest way of dealing with the problem.

  11. Appraisals are a scam. I’m working on a purchase at the moment that over 12 comps in the exact same subdivision (same floor plan on same size lot) in the past year prove market value is $114,080 but the seller won’t take anything less than $150,000. I even offered to let the appraisal set the purchase price and they said no, $150,000 or nothing. TOO FUNNY! It’s an old house that does not meet building codes or flood plain rules that needs $60,000 in upgrades to meet the requirements just like all the rest that sold for $80/sq. ft in the area even though they too wanted $105 sq. ft. I’m not paying it. There are plenty of other houses for sale especially by banks that I can get reasonably and then this sham of the appraisal game will bring that house value down even further. I hope when they do finally let go of it, they only get $60 sq. ft and kick themselves all the way to the bank.

    1. Let me get this right. The seller is unreasonable and is asking too much for a house. The seller refuses to set the price of the property based on the appraisal. Somehow this makes appraisals a scam? I think your beef is with the seller and not appraisers. Your example did nothing to support your claim that appraisals are a scam. Your whole post was devoid of logic.

    2. Buyer Remorse, so you’re saying the value of the property for sale is not worth it based on the comparable sales in the area? Isn’t that an appraisal?

  12. It seems to me the author has a god complex, and is simultaneously terrified the public’s discovery of his fallibility, ineptitude, and the mediocrity. An appraisal, by it’s nature should be an objective gauge of what the market value of a home is. Yes, based on OTHER properties recently sold and listed, and also, I would hope, based on lots of other information that is the business of the appraiser to know.

    When presented with a complex math problem, it’s ludicrous to go look in the back of the book for the answer first, and then proceed to explain how you would have arrived at that correct answer, now that you already know what it is. And then jump up and down and put everyone else down when they point out that you cheated. Yes, you cheated.

    It’s a circular argument, to base the results on the subject property and the terms of the deal that you are being called to weigh in on, and totally the opposite of what I expect an appraiser to do when I pay hundreds of dollars for those services. The self-righteousness exhibited in this weak-minded explanation, and the larger forest – that is, the way the real estate business is being done, is shady at best, but, more frankly, apparently corrupt.

    1. Bridget

      Thank you for your comments but I can only assume that you did not read my article or at the very least did not understand it. The explanation you give is exactly what I am decrying. The article points out that the sales price should be an indicator but not THE indicator of value. Are you telling me that if you appraised at home independently of the sales price and he came in at $199,000 but the purchase price was $200,000 that you would turn it in at $200,000. Come on.

    2. Bridget,
      I really hope you are not an appraiser with the logic you presented in your post. It is somehow cheating to look at the purchase price of the property you are appraising? It is an important piece of information for the appraisal you are completing. If an appraiser gave no consideration to a known purchase price than that appraiser should not be in the appraisal profession. To say this is shady or corrupt shows your lack of knowledge about what it is to be an appraiser.

  13. The reason the appraised value comes in very close to the actual sale price is because buyers, sellers, and agents are more knowledgeable about prices than most people give them credit for. The selling agent tries to list for a reasonable sale price, the seller wants max price but must be reasonable, the buyer’s agent knows if something is over priced and will suggest the buyer make a reasonable offer. And after the buyers have looked at many homes they get an idea of what a home is worth, more or less. Nothing in real estate is perfect and doesn’t have to be. Sometimes the sale price is over the market and shouldn’t be pushed. The buyer and seller can negotiate. Most sales are close to the sale price because the buyers and sellers are doing what we do in thier own heads in thier own way. Just like when they shop for cars, clothes, or groceries. The sales are usually in a range and the comps used to value were sold in a similar range. It is up to the appraiser to choose the best comps. If the comps are there then the sale price is reasonable and can be supported. Why be so niave to think your value is the only value ? Are you that perfect ? The comps are not perfect and the sale price is not perfect. Reasonable is good.

    The crash was not caused by appraisers. It was a bubble. Only sales can increase the price bubble, refis cannot. Low interest rates, easy credit, and buyer speculation created the bubble. And when the lenders took easy credit and teaser mortgage rates away, almost overnite, demand plummeted. The speculation bubble popped. Prices followed. It is that simple. Many buyers were speculating and willing to pay ever higher prices so they could get rich quick owning real estate. Bubbles always end badly.

  14. Nice, the opening paragraph was a perfect red herring for the comment section…as usual the section demonstrates the lack of understanding of what an appraiser’s role is. If only they looked into the sales side. I’ve been appraising since ’89, left the retail side around ’06 because I saw what was coming with the nonsense going on. I am still certified and I’m an associate broker as well. Here’s what I KNOW from being in real estate so long:

    1. Most agents – I’ll say 80% are worthless commission chasers. They should be consultants, they are not; they are salesmen and they tell clients whatever it takes to secure a commission. Not all – the vast majority. That industry is ONLY about agents that pay monthly fees, nothing else matters to the industry – the more the merrier.
    2. Most buyers and sellers are exceptionally stupid when selecting an agent. They consistent fail to properly vet them and will pick based upon blood, friendship, price, etc. They do not treat a transaction like a business deal and many are clueless to the process.
    3. Most experienced appraisers (incl me) left the retail side once all of the nonsense started during the crash. Now most appraisers see reduced fees, increased requirements and more underwriting call backs. They are in a sense, form fillers.
    4. The appraisal business is on the way out. We see that as appraisal data is collected and stored, used by lenders, FNMA, etc to essentially “underwrite” appraisals. AVMs continue to increase in use and the nonsense put on the business is going to kill it.
    5. Just as there are worthless agents, so too are there worthless appraisers. The difference is that there are multiple checks on appraisers that ultimately filter them. There are ZERO checks on the sales side, no one cares.
    I’m also an associate broker here in the Atlanta area so I see both sides of this fence. As far as appraisals coming in at sale price, Dustin explained it. The wild card though is “well informed buyer” – not all are (see #1 and #2). I have seen epic stupidity in my office as agents call me to “challenge” an appraisal. In almost every situation, the appraiser is spot on; the agent either acting stupid or genuinely stupid. No buyer brief before writing an offer, not market analysis…just write the offer.

    There is no one number for any home, there is a range established by the comparable data. The role of the appraiser is one of insurance; they do not assign value they merely ensure that the lender is covered and that things appear to be in order. The appraisal industry (led by the horrific Appraisal Institute) completely failed appraisers as the crash went down. This is the only field that has been pounded for the crash – what’s happened to agents? Any increase in standards? Of course not – who is going to challenge NAR?

    You guys commenting about how it’s all a racquet are focused in the wrong arena. Trust me, appraisers could care less about a deal; they want to write a report that doesn’t have call backs and move on to the next one. If you want to spend time looking at scams, look at the agent side – look at the requirements to become an agent, the lack of any production requirements, the fact that you can become a BROKER in some states NEVER having completed a transaction. Why isn’t there an apprenticeship requirement for agents?

    Then have look at what motivates Joe Citizen to take leave of their senses when selecting representation for one the largest financial moves they will make. Have a look at how they select agents, have a look at most agent sites and try to find anything of use. Have a look at one of the most power lobbies in Washington (NAR) and how closely they’re tied to DC and the “economic” news of the day. Are you fellas writing anything about how this “recovery” was pretty much propaganda and its finally being called that?

    Look at it another way – maybe the appraisers are there to keep buyers out of the trouble “trusted” agents get them into?

    1. Very well said. I agree with most everything you said. The appraisal business might be on the way out when it comes to tract house developments, but in unique area, rural areas, etc…..an appraiser will always be needed as long as banks are loaning money. A computer can not inspect a house and it can not be accurate in a rural area with very limited sales data. JMO.

    2. So far you are the smartest reply in the blog. The appraisal is for the entity that is eventually going to purchase the loan. The bank does not even keep the loan, they sell it to Fannie Mae or Freddie Mac. We now write a report to a computer that only allows numbers within the range of the un-adjusted sales price and the adjusted sales price. This has changed everything. UAD still a work in progress. But bottom line, the client is the entity that is giving the loan (or it’s agent ) and part of those rules are “supportable and credible appraisal value” . Frank/Dodd has given the banking industry approximately 398 new rules to live by. Compliance is costing the players lots of money and the appraisers who are ethical should be playing and not the others.

      Just a note: cost per sf includes land and views, etc. This line is used by Fannie Mae and Freddie Mac. It is a skewed value, can be talked about, but is not relied upon for value. Commercial appraisals use SF (or front foot).

      Most of my appraisal business was Refinance, and I do not need to know the number before I write up an appraisal. Federal law, USPAP, requires the appraiser to analysis the purchase contract. Talk to the federal government to have it removed.
      I still appraise as if the sales price is not influencing until comparables in the neighborhood are analysis and is a part of the process. Yes, I have seen flipped/remodeled homes put on the market far above the neighborhood sales of other flipped/remodeled homes and sometimes sell to the un-informed buyer. No it did not appraise for the sales price as the house next door was much lower. Sales next door and on the street should never be ignored by “any player” in the transaction, especially the buyer. Ethical appraisers don’t need the number we produce a report that is logical by methods that are not done in 5 minutes.

  15. Wow, I guess some of you are bitter toward the appraisal profession. All I can say is we ARE a complaining society.Doctors get hammered for double booking and making us wait, then asking us what is wrong BEFORE giving the meds (which don’t always cure the ailment). Then there are mechanics who don’t always diagnose correctly and we make multiple trips back to the station before it is right. Should I go on? No. Appraising, as stated over and over, is a process which can have varying results. In the case of all the items complained about in the above comments, it just sounds like you had some bad experiences or are just ignorant of a logical process that has NO bias (if done correctly). So writing that appraisals are a joke or that all (or most) appraisers are worthless is sad for those of us who get calls frequently by potential buyers, investors, real estate professionals and even lenders to ascertain value when it especially is a challenge to determine. I take great pride in being one (of I think many) who take a detailed, methodical approach to arriving at a probable price that a typical buyer SHOULD pay, not what he/she thinks it should be based on whatever motivations there are. This does include examining details of a contract, but if the entire process is done well, it is simply a small part of that conclusion. When doing private requests, I often give the parties involved the option to disclose or not. The value rarely changes because it is what it is. I’m sorry you don’t like the process but tough – that is what our profession dictates. I’m not losing a minute of sleep when someone doesn’t like my value – it simply does not happen very often and most who complain are simply uneducated to the parameters we have as well as the thoroughness we take to achieve a value opinion. I am happy to take the time to help them understand why the value is what it is. You likely were not given the time to understand. For that, I am sorry. Better luck next time and please don’t badmouth all appraisers. We are like any other profession – learning and evolving every day.

    For Dustin – I stand with you – it is clearly tough for us to explain how important our mission is to those who have a dislike for honesty. I would rather be ethical and have less work than please a buyer/seller and have remorse for the rest of my life. Fortunately ethics win in the long run and I have enjoyed a successful career with frequent referrals by those in my community who respect my diligence and professionalism.

  16. I have to agree with the first post by Matt. And, your ehortation to “go and make value” is completely misleading. It is the market that determines the value of real estate and most other things unless there is support, incentives, or something added to a transaction outside the normal of a market place. Too many number hitters already out there. They don’t need help from you as an instructor.

    1. Don….Obviously you are new to reading Dustin’s posts. If you had some experience in doing so, you probably wouldn’t have put your ignorant statement in this chain. First of all, It is so very easy to tell which people are appraiser’s responding to this article, and which of those who are not. It never ceases to amaze me how people are willing to throw out such ignorant statements in regards to the appraisal process/profession. Personally, I never comment on any profession of which I have never “worn the shoes”. If y’all care to wear the shoes I encourage you to at least take a look at the what is required to just get started being an appraiser. Good article Dustin. Wish I had more time ….but I have to get to a “rebuttal” now in response to my opinion of value, of which seems to have been different from the parties involved in the transaction. After that fun, fun, fun…..I think I will go create some more value today!

  17. Dustin,
    Good article. There are different schools of thought on this. I think you are right on. Sometimes yes we have to do our jobs, but by and large it is very hard to ignore the purchase price, especially when subject was exposed to the open market. The comments some have posted illustrate the lack of knowledge that have led to appraisers being the scape goat for recent events.
    Matt,
    Every appraiser who read your comments is likely shaking their head. It is better to remain silent and be thought a fool than to open your mouth and remove all doubt.

    1. Jon,
      I agree with your comments. I was shaking my head after reading Matt’s comments. He seems very bitter and some of his comments are way over the top. To not consider the purchase price at all in an appraisal is just ignorant.

  18. Dustin
    Is it really a violation to call a broker involved in the transaction if you are having trouble supporting a sales price… they know that particular market like the back of their hand… What if two of my “money comps” where actually divorce sales or quick sales and I didn’t know that. Etc. I think it just makes sense for an appraiser to make that call before they come in lower than sales price…
    Thanx

  19. I’ve enjoyed reading your articles for some time and find your missive regarding “that’s house is selling for $200,000, you come in at [$202,000” is very on target. I don’t mean to throw stones but. But you I’ve got to ask did you respondent Matt actually ever appraiser property. Granted when appraising jewelry, cars or artwork or properties not being appraised for sale purposes, we often don’t have a proposed sale price to consider, but when we do a meeting of the minds of the buyer and seller, acting prudently without undue influence, is often the best indication of a subject property’s market value. It’s unfortunate for those inside our industry failed to accept this realization and that’s exactly what it is -REALITY!

    Please keep sending your messages as I find them a very enjoyable professional distraction from the 500+/- appraisal assignments accepted annually.

    Lloyd James Eaton III (Jim)
    Certified Residential Appraiser, Custom Homebuilder, Fee-Based Real Estate Broker

  20. Another reason such a high % of appraisals and contract price “same”–noted in the original post but otherwise ignored? That buyer/seller renegotiate. What happens? For those that can not adjust, no appraisal ever goes to FNMA, FHA, etc. If do renegotiate, lender then wants/requires the new contract price. That is what the computers then see. The computer scan misses the big bold comments about changing the sales price from the original, about the changing of appraisal date, etc. Had a face to face discussion with FNMA reps at some conference over 20 years ago, before computer scans, where they complained they didn’t need appraisals because almost all were at the contract price and besides, there was no way they could loose that much money on residential real estate. (& those same guys probably had major bonuses and parachutes during the collapse.) If one really stops to think about it, by the time you have those where: 1. the contract does represent market value, 2. those renegotiated to market value, and 3. those that are flushed out and never see the light of day, it is somewhat amazing the % of appraisals resulting in a closed deal and where appraised value = purchase price is not approaching 100%.

    1. Gasper N.Liebe Melaine.Ich glaube, Sie können bedenkenlos Proactol Plus mit anderen Medikamenten einnehmen, aber um ganz sicher zu sein würde ich an Ihrer stelle lieber mit einem Facharzt darüber reden.Mfg,Gasper N.

  21. I agree that having access to the purchase contract is a useful tool in the course of performing an appraisal and that statistical data supports a range of values for any property (deviation), and I know every appraiser has met the client, builder, homeowner etc.. that just knows their property is the best of the best, the crown jewel of the neighborhood….the property that is going to double every other comparable in the area. Sitting all that aside the market is still king in determining the value indication for any property (with or without the purchase contract), having said that my policy is whatever the value indication is… whether it be $5000 short of the purchase or $30000 over the purchase price…. is what is turned in. Does my report support a property valued over the purchase? does it support a value $5000 less than the purchase? it should.. While I agree a range of values sometimes is more indicative of the subject property, we are not afforded that option. In a nutshell I appraise the property for what I can defend and support and that is what I report… my opinion let others worry about adjusting the sales contract, making LTV’s work, dealing with repairs etc… this is their responsibility…mine to report a sound, concise, defensible and well supported value..

  22. Dustin,

    I don’t know that I entirely agree with everything you’ve written, but there is one thing with which I DEFINITELY take exception. In your second paragraph, you call those who would dare challenge an appraiser to perform the appraisal without benefit of a copy of the sales contract “ignorant.” Well, as a general certified appraiser with more than 24 years experience, I’m hardly ignorant. Unless the property being sold is so unique or in such an inactive market that there simply are not sufficient comparables, any appraiser worth his pay should be able to reach a reliable opinion of value for the subject without knowing the sales price. If having a contract sales price was a necessary ingredient for a reliable and valid appraisal, then there could be no reliable appraisals when there is no sale–no reliable appraisals for tax purposes, divorces, estates, etc.

    You support your allegation that people are ignorant if they suggest an appraiser might perform a purchase appraisal without a copy of the contract by stating Standards Rule 1-5a requires appraisers to do a detailed analysis of the sales contract, when in fact, that is NOT true. You seem to have overlooked the first part of that rule which says that the analysis must be done “if such information is available to the appraiser in the normal course of business.” If the parties to the transaction have requested that the sales price be kept confidential and that no contract be provided, then the contract is not available to the appraiser in the normal course of business, and the appraiser is not then required to analyze the contract. It would be good practice in those situations for the appraiser to state that a copy of the sales contract was requested, but that the parties involved failed or declined to provide a copy. In doing so, you’ve shown that you’ve done your due diligence and not simply neglected a USPAP requirement. But the bottom line is that USPAP does NOT, in fact, require appraisers to have a copy of the contract and to analyze it as many appraisers seem to think it does.

    And by the way, for whatever it’s worth, when I purchased my current home last summer, I specifically requested that the appraiser NOT be given a copy of the sales contract. I believed that the contract price was not exactly market value for the home (HUD foreclosure with limited market exposure), but did not have the time to do the research myself, and I didn’t want the contract to sway the appraiser.

    1. You make some good points, Richard. I think that the practice of analyzing the contract for a lender client is mostly intended to find and call out anything that may differ from standard market transactions and/or affect a contract price- like large concessions or personal property items that are wrapped up into a price (like pool table, big screen TV, or evan a car in the garage). I don’t think anyone said it is a necessary component in order to arrive at a credible opinion – and I agree that it is not. But, if I were the lender, I would certainly want a professional opinion saying if the reason a contract price seems higher than most sales in an area is becuase the buyer and seller agreed to include a big screen TV, pool table, and $20,000 cash at closing credit and decided to add the “value” of these items into the price or the real estate – or – if it just happens to be a result of five competing offers that each have an escalation clause, thus raising the price level due to high competition in the market. I agree that there are instances when a contract will not be supplied, but it sure helps to see the contract when there is something “fishy” about a sale price and then you find out that the reason the price seems fishy is becuase they are essentially asking the lender to finance the TV, pool table, and $20,000 concession, which are not part of the real estate. In cases like these (although rare), the analysis of a contract can aid the lender client in that decision making process (how much to loan on a property). In a case where personal property and large concessions are wrapped into a price, if a contract is not provided and an appraiser “hits the number”, then the lender and the byer are instantly under water. The lack of contract provided for analysis does not make an appraiser ignorant, but there could be factors in the contract that can explain why an agreed upon price is not in-line with the best supported market evidence, thus help an appraiser make the case of why his/her opinion differs from the contract price.

    2. I asked USPAP teacher and he said” the normal course of business to obtain the contract” which is fine, but he also pointed out that you still are going to look at the listing information and analyze the listing. Now only the lender can give the contract to the appraiser (weirdly sometimes we do not get all the addendum’s and changed sales price), but we still have to investigate the listing activity. So really calling the agent to verify will still produce the sales price and concessions.

  23. As a Certified Residential of 17 years and although I usually agree with your opinions however this time I disagree.
    By requiring an Appraiser to review and comment on a sales contract should not be a “USPAP” requirement. By requiring this they have also caused us to break the Ethics rule.
    From the beginning of the assignment we are being influenced to appraise to a certain number. There is no other reason to provide us with the info they can say otherwise but is B.S.
    We have been clearly instructed with the Ethics Rules from USPAP “An appraiser must perform assignments with impartiality objectivity, and independence. “Without accommodation of personal interests with a “Bias” “predetermined number” before accepting a assignment.” The Ethics rule of the USPAP 2014-2015 edition continues to say You must not accept an assignment “…of a predetermined result”
    I too appraise rural areas with lack of sufficient sales data. I do not consider the REPC as a source of data. A contract where the “professional” representatives of the parties are paid on commission is not a source of data I trust.
    I fear some appraisers trying to please their clients and make a living “having a target sales price”. Attempting to bring in at a sales price violation of the Ethics rule.
    Be careful speaking with anyone including a Realtor without permission of your client or your in a violation of the Confidentiality Rule.
    I only read your article once and quickly if I have misinterpreted your intent I apologize.

    P.S. Now lets discuss why we search 36 mos for transfer history.

    Now go determine some market value.

  24. Being required to put a single, hard value on a property doesn’t do our profession any favors or lead to greater accuracy. There are so many variables that can go into the value of any particular property and many have little or no way to even be considered on the standard forms we are required to use. Giving a property a range of value would be a more accurate reflection of the appraisal process, in my opinion.

    Unless it’s a cookie-cutter home in a subdivision with many recent comparable sales where, as was implied earlier, any monkey could complete the appraisal, who here is good enough to say a property is worth $475,000 rather than $460,000 or $490,000? Most appraisals–at least in my area—are not cookie cutter. In these cases, the sales prices DOES provide some insight into the value as the willing buyer and seller are likely taking into account variables that can’t really be addressed on the form or easily recognizable from the type of inspections that appraisers perform.

  25. Good article, I have said many of the same things in my blog. One point of correction. When doing an appraisal for a purchase and a loan, the appraisers job is not to protect the buyer, unless the buyer is the client (very rare). The appraisers job is to protect the lender or those parties involved with the loan (like maybe the FHA insurance fund).

  26. One thing I hear too often: “value is what a willing buyer and a willing seller agree to”…. well, if you read the definition that is prewritten in all GSE (FNMA, etc) appraisal forms, as well as others, the definition actually states “the most probable price” that a property can bring. Not what “one” buyer and “one” seller agree to. I think that is a really BIG difference and worthy of remembering. Many of the comments here tend to be under the assumption that market value is defined by a single buyer and a single seller. Not true. It is up to the appraiser to form the opinion of a “most probable price”, which can be (and may often be) something other than what one seller and one buyer agree to.

    1. Mike E says: August 13, 2014 at 5:05 pm
      “One thing I hear too often: “value is what a willing buyer and a willing seller agree to”…. well, if you read the definition that is prewritten in all GSE (FNMA, etc) appraisal forms, as well as others, the definition actually states “the most probable price” that a property can bring. Not what “one” buyer and “one” seller agree to.”

      BINGO.

      The bottom line to this entire thread. And Dustin’s comment that the appraised value “should” almost always come in above the purchase price is ludicrous unless there is an increasing market.

  27. Someone asked me once how to recognize a good appraiser. Forgive my French but I told him to find one with a minimum of 4 a–holes- one the original and the other three courtesy of an seller/lender/realtor and even a buyer reaming him a new one for missing the sales price. Whenever someone calls me an a–h— my only reply is “you wouldn’t believe”. As far as getting the contract it really makes no difference to me as long as all the appraisers are playing by the same rules. Treat all appraisals as refi’s. Unfortunately, you and I both know somebody is going to end up with the inside track to the contract details and eventually end up with all the business because “that appraiser knows what he/she is doing”. Just like five or six years ago, before the amc/3rd.party and so called appraiser independence changes, there was always one or two appraisers who always hit the number and eventually ended up with most of the business. They also seemed to end up on all the lender/amc/3rd party lists when that started up. The problem is the system is never going to be perfect and every time our exalted leaders in Washington try to make it that way they screw up something else in the process.

  28. Dustin and responders, as always, I do enjoy reading the articles…AND,…as always…I usually either agree, pause and think, scoff, ridicule, smile, curse and outright laugh at some of the responses. The 10-15 minute break from my routine helps me to relax and realize that after 25 years, I still love this profession.

  29. One other good thing to remember: Real Estate contracts have a lot of other information than just “here is the price we agree on”. For example, there are sometimes concessoins included and sometimes the concessions are “wrapped up” into a sale price. Now, if the concessoins are higher than what is customary in the market, the price may be infalted as a result. That is just one example. Other things that exist in contracts include: financing options, gifts, non-real estate items included in price, rent-backs…. all of these could potentially affect the price; the appraisal has to see the contract in order to report to the lender if there are any unusual circumstances and to form an opinion of how any such items affect the value. If a price is $20,000 higher than the best market evidence and there is a $20,000 concession in the contract, it may be that the buyer and seller agreed to “roll the concession into the price”, which is not part of the real estate value. Any lender / client will want to know if they are making thier loan decision on real estate alone – or if they are being asked to finance a cash-back situation. Let’s not forget that all contracts are not simple.

  30. Good point – Steve Harrison. I am an appraiser and a Realtor, and I think it should be required practice that appraisers work with buyers at some point in their training. Buyers become very knowledgeable during the process – particularly with the wealth of information available on-line. If I am working on an appraisal of a home which sold for $200,000 and my best “historical” sales data tells me market value is $197,000 or so, my next step is to look at the history of the sale. Did it sell quickly, were there multiple offers, etc… In that case I would be inclined to appraise for $200,000 because I don’t feel like I am any smarter than that buyer who has been out there looking for several weeks. Conversely, if the home has been on the market for an extended time and there is no explanation as to why they are paying this price, I would be inclined to stick with my original assessment. The market tends to work itself out. The problems during the crash were from lender pressure, seller concessions, creative financing, junk loans, etc… I feel appraisers only share in a very small percentage of this blame.

  31. Boy oh boy……some of you people really hate appraisers! There are some bad ones out there (just like every profession in the world) but there are some really good ones too. Please don’t throw the baby out with the bathwater!

  32. The subject is not a “comparable” to itself. And a proposed, negotiated sale price is not “the answer.” Buyers and Sellers (and Lenders) simply need a credible, reasonable opinion of the value based ON (not “off of”, people) as many of the three approaches to valuation that are applicable. Now, go create some value estimates !

  33. The title of the article is deceiving. Tongue in Cheek? IF appraisals DID all come in above the purchase price THEN the inflationary bubble would continue to grow and grow until the whole world exploded into a black hole.

  34. Interesting article and interesting comments. On the one hand, as an appraiser, I would not mind working without knowledge of the purchase price and not having to analyze and report on the sales contract. Most of the sales contracts are about 25 pages of 99% boilerplate, with about 1/3 crossed out, all of which you have to read anyway to make sure you are not missing something, only to get to Amendment “A” that says: “Everything you read in the sales contract is not true if I tell you something different.” So you read through Amendment “A” and compare it to the sales contract to see what differences there are (if any), only to get to Amendment “B” that says: “Everything you read in the sales contract AND in Amendment “A” is not true if I tell you something different.” Once you have completed your task, you now have to report on what you read…and hope you did not miss something, or they neglected to send you something.
    On the other hand, as an appraiser working in an environment where you are not given the purchase price or the sales contract, you do your job, without any such bias (okay, maybe there is a list price to contend with), and you decide the value of the property is, say, $390,000. Do you really think it ends there? There are 3 followup options:
    OPTION A: You happen to hit the number right on the head: sales price is $390,000.
    “The appraiser came in for $390,000 and the sales price is $390,000? Someone must have tipped off the appraiser and slipped some money in his pocket. Call him up and find out who, and we better order another appraisal from a different appraiser. In the meantime, don’t give the first guy any more work.”
    OPTION B: You came in for $390,000 but the sales price is $412,000.
    Phone rings. “Excuse me, Mr. Appraiser. You came in for $390,000, but WE HAVE A VALID SALES CONTRACT for $415,000. Everyone is very upset. Are you sure you know this market? Can you explain to me why there is such a big difference?”
    “Uh, I would have to see the sales contract to answer that.”
    “Okay, we will send over the sales contract, but we need to have an answer by the end fo the day.”
    So they send over the sales contract, and there it is, right on page 1: SALES CONCESSIONS. Of course, their likely response is: “Yeah, so what? Everyone knows it is common and typical in the area. You really don’t know this market, do you? If you were not knowledgable about this market, you never should have accepted the assignment.”
    OPTION C: You came in for $390,000 but the sales price is $375,000.
    Congratulations. You lucked out. There are people out there who actually think you know what you are doing.
    Do you really think that in an environment where the appraiser is not given the purchase price or a copy of the sales contract, there are not going to be any followup inquiries, unless you luck out and have OPTION C? Let’s keep USPAP the way it is in this regard, but it is fun to consider otherwise.

  35. I’ve never seen anything wrong with putting a lot of weight on the subject’s contract sales price, provided it’s an arms length transaction. What’s tricky is knowing whether the buyer is “knowledgeable” or not, especially about substitute properties that are available. I’ve always wanted to express my opinion of value as a range rather than a single number. A single point placement of the value estimate is what puts appraisers in a bad light sometimes, like when the sales price is $301,526. It would nice to be able to say the property’s value is $295,000-305,000. Also, like another reader commented, I don’t understand why you feel that the value estimate should always be slightly ABOVE the sales price.

  36. Just a couple of quick clarifications because they have come up a couple of times in the comment section:

    1. The title of this article is, of course, somewhat deceiving. The original was written several years ago and was intended to answer the question I often received from Realtors and others as spoken of in the first paragraph. A more accurate (but less provocative) title might have been, Why Most Purchase Appraisal Should Come in Near the Purchase Price.

    2. If my tagline gets your collar hot and sticky, see this post:

    https://theappraisercoach.com/now-go-create-some-value/

    Off now to create some value with my kids!

  37. Hi Dustin,

    Thank you for the thorough explanation of the appraisal process. Just last night my husband used wording very much like those of the appraisal-process-ignorant, heavily insinuating that since appraisals almost always come in at or near the purchase price, there must be something amiss. My argument wasn’t nearly as eloquent as yours is here, but I do feel a little vindicated now, because I did argue that it is fact, quite logical if you step back and look at it.

    I have a specific question for you now. We are in the final stages of buying a home (we have the inspection scheduled for this week and we’re meeting our lender today about finances; the closing is scheduled for late September). The house we’re buying was originally listed at 140K and over the last 7 months came down 10K. We negotiated a final price of 127K and the seller pays 2K of the closing costs. The house is almost 100 years old and was just completely restored. We would like to remodel the upstairs, however, and so would like to be able to take a loan out against the house right away to pay for that remodel work. What is the likelihood that the house will appraise for 5K-7K more than the selling price (based on the original asking price, and the few comps that our real estate has, which were all around 130-135K)? And if it did appraise higher than the asking price, does that mean that there is already some equity in the house and we could take out a loan against it right away?

    We would like to know this as soon as possible; it may be a condition of our buying the house, and we don’t necessarily want to have to pay for an inspection on a house that we end up not buying.

    Thank you,
    Nancy

    1. Nancy: Not knowing any more about the situation than you have told me, I would say it is doubtful that the appraisal will come in much higher than the agreed upon price for the very reasons outlined. Sorry to be the barer of bad news, but if the home did not sell for the higher asking price, it is because the asking price was too high. You have both agreed upon a price (after an exposure time) and that is likely what it is ACTUALLY worth. Again, this is just a general statement of how things work, of course. All the best!

      1. Nancy – check with your bank about doing a “Subject To” refinance after you close or even a purchase with renovations now. They will have the appraiser value it based on a hypothetical condition that all of your renovations occurred on the date of their initial inspection. Then once completed, a final inspection will be performed. This way your appraisal will reflect the future renovations and value it accordingly, which now SHOULD be higher (in most cases, as long as their is value in the improvements). This may help you do what you need to without having the expense of 2 appraisals. Good luck!

  38. The article did not explain why the appraised value should come in ‘slightly higher’ (just above)! .

    Based on your over simplified bell curve justification, seems very fishy if half of your appraisals do not come in “slightly lower”!!!

    The example you gave where the purchase price is $370,000 but your value came in at $320,000 has nothing to do with the article titled “Why Most Purchase Appraisals SHOULD come in Just Above the Purchase Price”.

    After 20+ years of appraising, seems like you are still a bit wet behind the ears : )

  39. Great Topic. I wrote a lengthy reply and deleted it. Too much to explain to those who would just be angry with the truth.

    My short version is this: (LOL)

    I am an appraiser who will “hit” the contract price in 9 out of 10 appraisals. This in itself is not unethical or “inaccurate”. It is unethical to develop a predetermined value. Appraising a property equal to the contract price, even if the contract price was known prior to the development of the appraisal, does not equal developing a predetermined value. However, it certainly opens up the possibility when the contract price is known, to be sure. Or at the very least, create suspicion when the occurrence of appraised values equals the contract price as often as it does.

    Some appraisers are so afraid of their integrity being questioned that they will never appraise a property equal the contract price. I find this just as wrong as developing a predetermined value, considering they have decided against a certain value (the contract price) on the basis of fear instead of facts or opinions. That said, I do understand their fear in an industry that so often ends up as the scapegoat.

    I am an ethical and competent appraiser. For that reason, I do not fear my integrity being questioned. I develop an opinion of value by first analyzing all sales in a certain market, making note of why the highest priced sales might have sold for what they did and why the lowest priced sales might have sold for what they did (noting differences). I then go through all the sales, compiling sales of properties that are similar to my subject (or that would be substitutes in markets with less sales data to work with). Once compiled, I then have what I call my “comparable pool”. At this point, I have already developed a rough range of value for my subject. I then look at my comparable pool, again noting the differences that might make a buyer pay more or less for a property. From there I figure out where my subject “plugs in” so to say. I again refine the comparable pool down to the most physically, locationally and functionally similar sales. These are the sales that will best determine what the most probable range of value the subject itself might have sold for. I would love to stop right there and tell the client their property is probably worth somewhere between x and y. Why? Because at this point in the appraisal process, too much reconciling of data begins to occur. The individual adjustments are the most opinion laden part of the appraisal and in my opinion serve to make a report less credible, instead of more credible as it was designed. Anywhos, I then select the sales I feel best serve to support my opinion of value (and in the case of a mortgage appraisal also serve to satisfy the client expectations of support), and make my adjustments anyways. Once adjustments are made, it is rare (at least in my market and most in the country), that the adjusted sales prices of all comps are equal.

    What? Goodness. How did that happen? I thought appraisal development was an exact science! I could have sworn I knew what I was doing! Could I be so wrong? Should I do it again? Or maybe, just maybe, the whole thing, the data, the process, all of it, is not an exact science and does not all compute like a simple algebraic equation as the masses have come to believe? Now what? I have a range of unadjusted sale prices AND a range of adjusted sale prices. What the F is the value of the damn subject property anyways? Fuck! Can I really get sued for this decision? Do I really do this for living and a measly couple of hundred bucks? Is it the highest, the lowest, right in the middle, should I just pick one, should I average them, weighted average them??? Why cant the bank just use a range? The appraisal would actually be more “credible” or “accurate”, so to speak. Fuck! Hmm……..but wait!!!! I have a sales contract! This is a contract between a willing buyer and seller, arms length, recent, SUBJECT SPECIFIC and not only all of that, the contract price just so happens to fall within the range of value that all the other comps do – how about that!!!!

    At this point, why would it be unethical to use the sales contract as a subject specific, recent, arm length and SECONDARY indicator of a REFINED SINGLE POINT OF VALUE for the appraisal? As far as I am concerned, it is not only ethical, but the right thing to do. This is a far cry from a predetermined value.

  40. Just signed an agreement to purchase our 14th home. The term “been there done that” come to mind? The last three homes I have purchased and the last three I sold appraised at, you guessed it, exactly what the sale price was. This is just outright laziness on the part of appraisers. A few credit unions (I use only credit unions) will loan 80% of the appraised value. In other words, if I buy a home for $100,000, and it appraises at 124,000, I need nothing in the way of cash down payment. See where I’m going with this? 99% of the time this $124,000 home will appraise for $100,000, the sale price. Never trusted appraisers, nor “home inspectors” because most get their license from the back of a comic book. Had one appraisal on a home all in lower-case, many mis-spellings, comps from another county, and on and on. $450, no recourse. Financial institutions need to stop leaning on appraisers so much, get out from behind the desk, and look at what you are financing.

  41. I should add to my comment above, I buy only stressed-distressed homes or homes owned by stressed-distressed homeowners….the current property I am buying is easily $20-$30,000 above the price I paid but more than likely, the appraisal (my expense) will come in at the price I paid. The home I just sold appraised at x-dollars, I sold it for $22,000 more than appraisal (buyers paid cash). On a home under $100,000, this is a huge difference.

  42. I didn’t read all the comments above because honestly a lot of them were very petty and sounded like they were coming from teenagers and not adults…but I agree that the whole idea of knowing the purchase price prior to performing an appraisal seems a little off. I am in the process of buying my grandmother’s house and I was told by my lender that my appraisal will probably come in around my purchase price. My issue with that is I am fairly certain I am paying less than the house is worth since the seller is my grandmother. I understand using the purchase price as a reference because fair value is the amount someone would pay in the open market, but a sale between related parties is not necessarily the same as a sale between unrelated parties. I would hope this is considered by an appraiser by giving less weight to the purchase price when performing his/her analysis. Some might not see the issue as long as the lender approves the loan but really it is an issue for a buyer since they potentially do not have a true value of what they are buying. The issue for me with potentially not have a true, unbiased appraisal of the home I am purchasing is PMI. I am not putting 20% down on my purchase so I will pay monthly PMI until I reach 78% LTV. How can I reasonably judge when I will reach 78% LTV if I do not have a good starting point of the home’s value??

  43. Knowing the pending contract price prior to completing an appraisal is one thing… completing a proper analysis of the purchase agreement during the development of an appraisal report is another. In my rural market area where there is no public disclosure of real estate sales, appraisers rely heavily on sales data available from the real estate agents. Some of these agents are very truthful and disclose concessions, personal property, etc in their closed sales; however, I’d say 95% of the time, the verification process of talking with the agents to discuss the sales data disclosed in the MLS sales sheet, reveals other pieces of the puzzle that are not included on the MLS closed sale sheet, but are extremely important in developing a credible opinion of value. Similarly, simply knowing the pending contract price has little influence on my pending opinion of market value without knowing whether there were any concessions, personal property items, seller paid closing costs, and/or the motivations of the seller and/or buyer included in the pending contract price. Once these details of a pending sale are properly researched and analyzed, the pending contract price becomes a strong indicator of current market value (because the subject property is always the best pending comparable sale).
    For this reason, I make it a practice to include the subject in the sales comparison grid so that I can include my analysis of the contract in the reconciliation of value within the sales comparison approach, which also allows me to discuss its relevance in the final reconciliation of the three approaches to an opinion of market value. (If you decide to follow this best practice, just make sure you include the subject as a comparable sales in position 4 or higher for the secondary market appraisals, as the FNMA selling guide requires comparables 1-3 to be closed sales prior to the effective date.)
    I’d be interested to know how other appraisers are attempting to include the analysis of the pending sale contract in their appraisal reports, if they do not include the analysis of the pending contract in the sales comparison approach.

  44. How does an area ever appreciate if appraisals are only coming in at what previous sales were? If my neighbor sold her condo a year ago for $90k and mine sells this year for $110k, without any other comps, how are you going to justify the price? Surly there are sales that set a new comp, how do they appraise out?

    Also, how do appraisers assign a dollar value to adjust for improvements? If my place has a full interior remodel and looks and feels like new construction, surely it has to appraiser for higher than the identically sized and laid out property next door with 20 year old finishings. So how does an appraise determine what additional dollar/SF the remodel is worth?

  45. Matt,
    You are absolutely right. I have done a lot of RE deals in my time, and was a licensed RE agent for years. At one point I decided to take an appraisal course to improve myself. It didn’t take long to realize that the whole game (as taught at a branch of the University of California by a licensed professional appraiser) was to use any kind of factor imaginable to justify a predetermined price. The first time someone started working one of the problems out for the class, I actually laughed because I thought it was a put-on. Then I realized this is actually what is done. So I walked out and forgot about trying to use appraisals as an honest evaluation.

  46. I understand that you are using the purchase price as a part of your appraisal. The problem comes in when a buyer finds a property and negotiates for a price well below what the appraisal value should be but the appraiser looks at the purchase price and bases value just above the contract price. It hurts a buyer trying to use the equity that should be there for better loan terms and future selling power. Example I found a property that was 5000 sq.ft. new roof completely renovated and up to code. Several comps. In the area for unrenovated same sq.ft. came in at $220000.00. The owner fell on hard times and was willing to take what she owed which was $120000.00. I never spoke with the appraiser. I just wanted a fair and honest appraisal. Guess what the appraisal came back at $125000.00. You can not convince me that it is because I am not as smart or understanding of how the appraisal process works that leaves me feeling cheated out of the $1700 I paid to the appraisal company. The appraiser used the contract solely instead of as a tool in aiding in assessing the value.

  47. Keith:

    Thanks for the comment, but I think you may have misunderstood the article. If you read it, you will find that I said nothing about basing the appraisal on purchase price. Does that happen with some, less than reputable, appraisers, but that is not the rule. The point of the article is that, if the invisible hand of the market is at work, appraised value will be the same as purchase price. Obviously, this principle does not apply to distressed situations as you described.

  48. I haven’t read all of the comments above but did read the original post and some of the comments after it. We are attempting to buy a home where we plan to live for the next 20 years. This will be our 4th home purchase and so we are not brand new to home buying but we are not real estate experts either. We have found a home that we really like, but it is in a completely different real estate market than our previous purchases and so determining its value has been difficult for me. I think the home is about 10% overpriced. The seller obtained an appraisal (based on a tentatively agreed upon price) that came out right at the asking price. I wasn’t convinced but we did place a contract on the home for about $9k under the appraised value. I believed at the time that the second appraisal, that would be required to get a mortgage, would be our safety net to keep us for overpaying. I thought that 2 appraisals that are very close to the contract price would be proof that I am not overpaying for the home. The second appraisal came to the exact dollar amount of the contract price. I know that I am one of “the ignorant” but reading the original post certainly didn’t make me feel any better. It seems that most of those on here that do appraisals are required to use the contract price and believe that is a good indicator of value, as it means that someone has agreed to pay that price for the home. Maybe so, but I think its important for buyers like me to know that the appraisal isn’t intended to keep someone from overpaying for a home.

    1. I encourage you professional appraisers to think about this issue from the Buyer’s point of view, which Charles nicely presented in his May 11 post. The message we Buyers hear over and over from both Realtors and appraisers is that we should not worry about over-paying, because the lender’s appraisal will protect us from overpaying. Dustin’s post confirms our fears—that the Buyer’s “opinion” of value, reflected in the contract price, influences the appraisal. Now, in an urban setting a competent buyer working with a competent Realtor can find lots of good comps, and should be able to avoid making an offer that is significantly above market value. However, when buying a custom home in a rural area there ARE NO GOOD COMPS. As a Buyer in that situation, I simply do not have the expertise to **rationally** decide what I am “willing to pay”. I am willing to pay “the most probable price” that a property should bring if I (immediately) resold the property—which is precisely the “market value” that I so desperately want the professional appraiser to estimate.

  49. I’m sad that this article got so many negative and seemingly petty responses. I found it very helpful as someone going through the home-buying process for the first time. Thank you for writing it as there is a dearth of good appraisal articles on the web.

  50. Let’s keep it short and simple…Just think of it this way, We are all appraisers because of intuition. As a buyer/seller we know what we are willing to pay for a property just because we have ( intuitions). As far as an appraisal being appraised based off of what other properties surrounding is just plain laziness and just goes to show that America has just become lazy in a sense. A house should be appraised as its the only property in sight. A well maintained kept property should not be valued the same as a house that is not well kept in the same subdivision. As a buyer I purchased a property for 154k but the house was appraised for 173k as is in a nice county. So whomever the appraiser? Good job or bad job? I’m sure a lending agency would appreciate it because of the sale going so smoothly? Who knows if a home has good bones or bad? Appraisals could/can be very iffy but to the appraisers whom dot all their I’s and dot all T’s kudos. To me its not complicated at all. I know what I want and what I’m willing to pay for it. Plain and simple! Period.

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  52. TAC,

    My question isn’t about appraisals coming in low, but about appraisals that come in higher than the sale price.

    It’s not uncommon for a relatively savvy buyer to encounter a less than savvy or simply desperate seller. Take an unusual multifamily property with say a 2 year old tax assessed value of $280k, seller asking $200k, negotiated sale price $175k. A review of the municipality’s tax equalization ratio reveals that the tax assessment is a bit high. Equalized for 2015, the value is $250k.

    I can guarantee with near 100% certainty that an appraiser will conclude that the property value is somewhere in the the $175-180k range with comps carefully selected and adjusted to support that conclusion. A more thorough review of the local market reveals that carefully selected and adjusted comps could have supported a value closer to the seller’s original asking price of $200k.

    Why, in all of my years of reviewing such appraisals, have I never seen…not one time…an appraisal significantly higher than the sale price. For example $200k on a $175k sale?

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  54. The Industry has learned nothing from it’s recent collapse! A family member who is purchasing a home for $240k just had an appraisel come in at $260k??? The comps were cherry picked from the 3 highest closings! The amenities were not even equal: Ex. Full finished basement vs. no basement? My review of closings on Realtor.com put the price closer to $225-230k (common sense), but I’m not the professional! It seemed the appraisel was favorable to getting the deal done? Unbelievable!

  55. You clearly do not know how to appropriately appraise a property for lending. In 42 years of appraising, I have never once heard that an appraisal for lending should come in just above the contract price. This is a predetermination of the appraised value before even getting the assignment. In your example of a $200,000 sales price, then stating the value should be $202,000 is a predetermination that the appraisal should be 1% over the sales price. This is a violation of USPAP, and you openly state that this is your practice, this makes you look pretty stupid to the appraisal community. You call yourself “The Appraiser Coach,” why are you coaching appraisers to disregard USPAP and placing their license on the line, Noone in the appraisal profession is so good that they would come in 1% over the sales price; that would cause a lot of questions and will probably get someone knocked off an AMC’s list.

  56. I read the post and every comment and wish I had read it all before we reached a price to sell our house for sale by owner. We did a pretty good job without much in the way of comps in figuring a price we would accept without a lengthy sale time. To do that we deliberately went under the probable value of this home. Now reading all this, I’m realizing that the offer we are in the middle of working with, will mean that it will probably only be assessed for the selling price and not the true value and the buyer can now try to get us lower so they can make repairs that have shown up in the inspection. We already considered all this and have the price lower than it’s value even if it needed these repairs! So, we could say to the buyer: “Sorry, but the appraisal is coming out this way because the appraisers mostly appraise it to the selling price or close to it even though it’s really worth much more so we’re sticking to the price we agreed on. And I know this, Mr. Buyer, because I read it on the internet!” Yeah, right! Here’ I was thinking that an appraisal would come in much higher so we could say, “our price is fair considering the amount of the repairs which would still bring you under the value of the house”. Very disappointed to learn this. Now I’m hoping this deal falls through and we can then raise the price to closer to where it should be and then take cash and not need an appraiser and lenders, etc.! Much simpler and we could go down easily.

    1. If you read the article, your comments do not reflect a correct understanding of it. Your comments reflect the title, which is not the full story what is in the body. The only reason and appraisal should come in near purchase price is if you have priced it according to market value. Most sale prices are priced accordingly, and thus the reason why Appraisals reflect such. Please reread the article in this light.

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  59. Everyone seems to talk about a low appraisal, blowing a deal. What about the other direction, a high appraisal?

    I’m in the process of purchasing a home, we have lost two in the past year we’ve tried to purchase; one because of the selling our house contingency and the first because we couldn’t agree on a price and during negotiations someone came in with a higher offer. We currently live an a very expensive area where the average detached home in the county is selling around $650k.

    Our latest dream home is a neighboring state less than 30 minutes from where we live and the price was similar to houses we’ve looked at, so we made an offer quickly as others were interested. We eliminated selling our home as part of the contract and the sellers accepted our offer. As we researched the market more closely we realized we may have offered too much even though we went 5% below their asking price.

    The appraisal finally arrived and low and behold it came in at the exact price the seller had it listed. Everyone was excited, we now had built in equity! The problem is the appraiser used only 2 comps that were in the same town as the subject. The reason I question that is for the fact that over two hundred homes (200) have sold within the same zip-code as the subject in the past year. Before you say it, two of his comps were almost a year old. In addition to that, the average Gross Adjustment was almost 40%. Three of the comps were adjusted over 65%. If your going to make those kind of adjustments wouldn’t it make sense to at least be in the same town?

    Now the issue is I’m afraid I may be purchasing a home that will be underwater as soon as the ink drys? There are homes with the same sq. footage, lot size and views which have sold for about 100k less in the same area. To me this why the appraiser shouldn’t see the contract, they are supposed to be the expert, make the evaluation based off of what’s sold not the pending sale of the subject home.

    Just my 2 cents or should I do a net adjustment of 30%?

  60. Can you tell me the maximum amount an appraiser is allowed to offer value over contract price? I was told there is a percentage rate over contract, potential loan amount in our area.
    Central Texas.

  61. Appraisers value property for what they are worth despite the purchase price. The price is only one consideration. No, there is no maximum above purchase price just as there is no minimum below.

  62. I completed certification coursework to work in the residential real estate industry as both a Real Estate Agent and Residential Real Estate Appraiser. In addition, I worked at a Residential Real Estate Appraisal Management Company in the appraisal review department for almost two years.

    The way the business was set up was one parent company owned two separate subsidiaries. One subsidiary contracted appraisers to perform the original appraisals, whereas, the other subsidiary contracted appraisers to perform review appraisals.

    At first, I was in charge of processing the appraisal review orders from start to finish. I was also in charge of locating appraisers to complete the review orders within 24 hours who were either already on our fee panel or searching for new appraisers to add to our fee panel and complete orders. Upper management, mostly the Operations Manager, instructed me to remove from the fee panel any review appraisers who disagreed with an appraised value when the original appraisal was performed though our sister company. In addition, the Operations Manager went as far as saying “we will destroy anyone who disagrees with our fee panel appraiser values.” At this point, I thought appraisers were honest and ethical and was lead to believe both fee panels comprised the best, most ethical and honest, and the most accurate appraisers within the geographic areas where we provided services to our clients.

    During my training, the “previously licensed appraiser” who ran the department and the “previously licensed appraiser” who was the Operations Manager overseeing both both subsidiaries told me appraisers should always be over/above the purchase price. Their reasoning lied in the fact that the best indicator of what a home is worth is the price agreed upon between the buyer and seller. So, when an original appraisal valued a home at the purchase price, which happened 99.99999% of the time when the original appraisal was performed through our sister company by one of their fee panel appraisers, the client sent an appraisal review order to our company. Then, the appraisal review was performed by one of our fee panel appraisers who agreed with the original appraised value 99.99999% of the time. When either appraiser ever dare appraise a home below the purchase price, upper management engaged in strong-arm persuasion tactics to get the appraiser to see it their way. I guess you can call it the proverbial “rubber stamp” job. I was instructed to complete each appraisal order where the “rubber stamp” job occurred and send the reports to the client. So, the two subsidiaries appeared to be separate entities and independent of each other for legal purposes. But, in fact, as time passed and I became more and more accustom to what was really happening, I noticed upper management began to instruct me to co-mingle the fee panel appraisers because “we had to get the review orders completed within 24 hours or less.”

    Our company was becoming less and less “independent” of our sister company because the number of “rubber stamp” review appraisers on our fee panel was slim. I followed their instructions for at least six to eight months up to the time when I began my appraiser education coursework and they promoted me to Appraisal Review Manager.

    I will never forget the first time I spoke with an honest and ethical review appraiser about an inflated appraised value that was done by one of our sister company’s fee panel appraisers. Upper management had already attempted to strong-arm the review appraiser into agreeing with the original appraiser value, but he didn’t budge. For my own sake of clarity and to gain further knowledge toward my education coursework, I called the review appraiser to ask for an explanation about why there was such a huge discrepancy in the two appraised values. I told him I was studying to start a career as an appraiser and had never encountered a similar situation. He explained his position carefully and meticulously to me for about an hour. He went through the appraisal line by line, comp by comp, and explained why the original appraisal was wrong. I took notes and researched the available public data sources to confirm the reviewer was correct.

    Once the conversation was over, I went to speak with the Operations Manager to further explain the review appraiser’s position. Nevertheless, the Operations Manager conjured up some story about how appraisers need to choose their comps to make the value fit with the purchase price, no matter what. Then, the Operations Manager instructed me to remove him from the fee panel and never send another order to him (even if it meant using one of our sister company’s fee panel appraisers). Furthermore, the Operations Manager instructed me to withhold the review from the client and send the appraisal to one of our sister company’s fee panel appraisers so they can agree with the original appraiser value.

    I completely disagreed with the Operations Manager’s point of view in this case and made my point of view known to him. Nonetheless, I did as I was instructed because a part of me trusted his decision. Most times when a situation like this occurred, I made a note that it was his decision.

    As time passed and I completed my coursework, I began to see what was really going on at this company. I did my own research and completely overhauled our fee panel by replacing the “rubber stamped” with the honest, ethical, and accurate review appraisers. I told upper management several times about what was going on and why I felt it necessary to provide honest, ethical, and accurate appraisal reviews for our clients. Looking back on the chain of events that followed, I can honestly and ethically say we didn’t see eye to eye.

    I saw the entire picture when we began accepting review appraisal orders from clients who had the original appraisal performed by a different company. In this case, the Operations Manager instructed me to withhold review appraisals from the client when the values coincided. Then, create a new order and send It to one of the appraisers on our sister company’s fee panel who disagreed with the original appraiser value 99.999% of the time. Thus, I stopped complying with those instructions shortly after I realized the Sales Manager was using these review appraisals to solicit business from those clients who were using other companies to satisfy their original appraisal orders. Still doesn’t sound like a scam?

    During the overhaul, I engaged in many harassing conversations with brokers, agents, loan officers, etc. The amount of open orders at a given time decreased by at least 50%. In addition, the amount of open orders at our sister company decreased by about 60-70%. Upper Management blamed the problems on the obvious culprit, the Appraisal Review Manager. What better scapegoat than the most honest, ethical, and hard-working individual in the office when you are running a scam?

    It was terrible to see our clients upset with honest, ethical, and accurate appraisal reviews. But, I refused to compromise my morals and ethics for an increase in orders. Upper Management began to alienate and harass me on a daily basis during this period. They began to falsify the “black-listed” appraiser lists we received to show the honest, ethical, and accurate review appraisers on our fee panel could no longer be used to complete orders.

    The proverbial straw that broke the camel’s back was when a client questioned me about an appraisal review completed 18 months prior when I just started working at the company. The loan went bad and the bank was foreclosing on the home. In addition, the appraisal value and review appraisal value coincided with the purchase price. The bank now wanted to know why the purchase price and appraised values were unsupported by the comps used in both reports. The client was irate and wanted someone held accountable for the poor quality of the reports.

    I advised the Operations Manager of the situation and he said to wait for him to come up with a solution. About an hour later, he walks over to my cubicle and tells me to send a note to the review appraiser requesting she amend her report to include a comparable that was unsold at the time the appraisal and appraisal review were completed. The comparable in question had a subsequent purchase price that supported the purchase price of the property in foreclosure.

    I knew this practice was unacceptable and basically illegal according to USPAP guidelines as well as standard appraiser valuation methods. But, I sent the note to the appraiser and made a subsequent note that the Operations Manager researched the comparable and the request was ultimately made at his behest. Then, the Operations Manager tells me that he just talked to the appraiser on the phone and she is going to amend her report with the comparable to support the purchase price.

    The very next day, the Vice President visits my cubicle and asks me about the comparable, the request, and the notes in the file. I explained I followed the Operations Manager’s orders and sent it to the appraiser against my better judgment. Then, the Vice President talks to the Operations Manager, who denies even knowing about the situation. He even goes as far as saying I should have advised him of the problem so he could handle the communication with the client. Who do you think the Vice President believed?

    Not even a month later, the President publicly accuses me of stealing money from him and defrauding him based on zero evidence. Of course, I denied the false allegations and requested proof of the accusations, which he refused to provide. Then, he fired me and issued my final paycheck to me. Logically, why does an employer issue a terminated employee their last paycheck when he accuses the employee of previously stealing money from him? Does it even make sense? No.

    A month later, I send him an Email requesting he comply with the states applicable labor laws and provide written documentation of the reason my employment was terminated. What does he say? He says, “Your services were no longer needed.” So basically, he falsely accused me of theft and fraud with no evidence, publicly slandered and defamed my character to prevent me from starting a career as an appraiser, and terminated my employment because my services were no longer needed. I was the most honest, ethical, and hard-working person in the entire office. I just disagreed with their fraudulent appraisal methods and schemes, put an end to the review company partaking in that type of activity, and exposed his scams at their core.

    Moral of the story is to be weary of appraisers, brokers, and agents, especially those who engage in elaborate scams and train their employees so they never become aware of the scam they are aiding and abetting.

    The purchase price and purchase contract must be analyzed when performing an appraisal, it’s the law. But, an appraisal should be performed as an independent valuation of the subject property, regardless of the price agreed upon between a buyer and seller. It should not be based upon what the property may sell for in the future and what comparable properties sold for in the distant past. It must be based upon the most recent arm’s length sale prices of the most comparable homes available at the time of the effective date of the appraisal. Many appraisers arrive at a value in many different ways and consider a wide variety of market influences. The most honest, ethical, and accurate appraisers don’t agree with appraising a property at a purchase price of $1,000,000 just because a buyer and seller agree to that price. When the property next door has the same sq ft, same amenities, same utility, etc. and sold for $800,000 a day earlier, an appraiser has no leg to stand on. The argument of price as the best indicator of value is null and void. Stay away from the con artists who helped collapse the housing market back in 2008-2009. An informed buyer is sometimes the only remedy to avoid real estate and mortgage fraud schemes.

  63. Interesting points by all. I welcome your comments to my most recent experience. I’m open for all.

    My client made an offer based on comps that I pulled of $260,000. The home is 3BR,21/2 Baths on 18 acres with two pole barn outbuildings and a guest house in a very rural area of Arkansas. The seller countered back at $275,000. My buyer accepted knowing she could back out if the property didn’t appraise. The lender uploaded only the original contract into the VA appraiser’s portal. The appraisal came back at $264,000. I left messages with the lender asking how far out the appraiser went to look for comps, could we appeal if necessary. The lender took it upon himself to ask for a new appraisal, uploaded the counter of $275,000. And miraculously the new appraisal came in at $280,000. I’m waiting for a copy of the new appraisal. The appraiser talked to the listing agent to ask how he arrived at price and went out more miles to get four additional comps for a total of seven.

    How can this not throw shade on the whole appraisal process?

    We are still deciding how to proceed. The Inspection Repair Survey Addendum is still in the seller’s hands and that may be our out.

    Opinions, please?

  64. This was a great read and it really does help to have some of those appraisal questions answered. I particularly like that you bring up the importance of taking the value that has already been discussed into consideration. After all, that could be a big indicator of what your appraisal will be based on.

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