5 Red flags during a home appraisal that agents should be aware of

Red flags during a home appraisal that agents should avoid

Five red flags to avoid for a smooth appraisalIf real estate agents knew about the red flags during a home appraisal that appraisers are on the lookout for then they could do a better job of pricing their listings and providing backup support for their contracts. Providing tangible market data for your listings can make or break a deal.

Contrary to popular belief appraisers are not out to kill your deal. We face our own set of challenges when performing appraisals. We cannot just go on a feeling but instead must provide market support for our opinions of value. Today I want to share with you what goes through an appraisers mind during an appraisal assignment so that you can prepare in advance for any issues that may come up. This can answer questions appraisers have and potentially speed up the appraisal process because they do not have to spend time calling the agent to get information to explain how they came up with their list price or contract price. Please let me know your thoughts at the end after reading.

Here are 5 red flags that you’ll want to avoid if you want a smooth closing.

Flag #1: Big increase in sale price in short period of time for subject property

A large increase in the contract price for a home that recently sold can set off an appraisers “spidey sense”. Keep in mind that appraisers must report and analyze any sales with the subject property within the past 3 years of the date of the appraisal.

When analyzing this information the appraiser must explain why there is such a large difference between the twoAppraisal red flags sales. There are reasonable explanations for large differences and the appraiser must include this within the report. Lenders are more sensitive than ever to mortgage fraud and one of the ways they choose to prevent this is for the appraiser to provide iron clad support for their value opinions.

Real estate agents can be proactive and help by providing an explanation for significant differences. Some common reasons for this type of scenario may be that the first sale was a distress sale situation like foreclosure, divorce, or short sale. Another reason may be that the owners did significant renovations to the house. A combination of the two could also have occurred. An investor may have purchased a home in foreclosure AND made significant improvements that have increased the home’s value. The important thing to remember is to provide an explanation to the appraiser so that they can include it in the report.

Flag #2: Contract price that is way above recent sales in the neighborhood

It should be no surprise that the best sales that an appraiser can include in an appraisal are the sales from within the subject subdivision or immediate neighborhood. Whenever we compare the contract price to what other homes in the neighborhood are selling for, we look to see if it is significantly higher or lower than what others have sold for.

If it is higher than all others it can be a sign that the home was over priced. There could be good reasons for this and if this is the case then you should provide an explanation. It’s quite possible that this is a very popular neighborhood with demand being good. This, combined with lower inventory levels, may have created a situation where the higher price is warranted. Additional information you may want to consider providing the appraiser is that of back up contracts. If you have 2, 3, or 4 back up contracts in this higher price range it shows that there is good demand for the area and there are other buyers willing to pay a higher price for the home.

Of course on the other hand if the higher contract price cannot be supported, and was a result of the buyer wanting to get this amount for their house then the outcome may not be good. This type of deal was dead from the start and the appraiser should not be blamed for the deal falling through.

Flag #3: Home a lot bigger than other homes in neighborhood (overbuilt)

When a home is overbuilt for the neighborhood it means that it is usually larger than most others. The construction costs for a larger home usually do not translate into market value, especially if they are significantly larger than all of the other homes.

One problem I’ve seen in the past is that agents may look at the average sale price per square foot of homes in the neighborhood (which are smaller) and then use this figure to arrive at a list price for the larger homes. This may work if the home being priced is similar in size to the others (and there are no other big differences) but if the home is larger then doing this will give a value indication that is too high.

This is due to the economic principle of diminishing returns which states that the more square footage you add the less value you get per square foot for the larger size. If you multiply the average price per square foot of the smaller homes by your own square footage then your home will be overestimated, which could be a deal killer.

Flag #4: Sales provided to appraiser by agent from outside of neighborhood when there are good recent sales in the neighborhood

Some appraisers don’t mind agents providing sales while others do not like it. I myself do not mind it because I want all sales to be considered and the agent may provide a sale that I may have overlooked. With that being said I always let the agent know that it is not a guarantee that I will use them and I must qualify them as good comps before including them in the report. They must pass underwriter guidelines as well as be true comparables. As I have said in the past, “comps are always sales but sales are not always comps”.

Agents should not look outside of the neighborhood for sales just to support a preconceived notion of value. If the sales within the neighborhood do not support the higher value it is a good sign that the home is overpriced. I always encourage agents to first look inside the neighborhood for sales because they more accurately reflect the market value of the home and take into consideration its location and other factors.

Flag #5: Agent has included non GLA areas in overall square footage when pricing the home when they should not have been included.

When pricing a home it is important to accurately report the correct gross living area (GLA). The GLA is the figure the appraiser uses when calculating price per square foot.

If an agent combines areas that should not be included in the GLA then this figure can be overstated. Pricing a home based on this larger square footage will result in it being priced too high. The heated and cooled square footage of a house contributes much more value than does a screened porch, however if you lump all of these together and value them all at the same amount then your list price and contract price will be too high.

There are ways to accurately get the square footage of a house that includes knowing how to measure a house and what areas to include in the GLA. If you cannot or do not want to do this yourself you can hire someone that understands the differences. The important thing to remember is that you want to include the same areas the mortgage appraiser will when they do the appraisal for the sale.

Question

Can you see why the situations I described above would throw up red flags during a home appraisal? If you have additional questions about how you can reduce the red flags in your listings leave me a message below. As always, thanks for reading.

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Comments

  1. Tom, how in the heck did you know about the details of the appraisal request on my desk right now? LOL! I mean sure the ppsf of the slightly larger subject townhome proofs the price against one or two out of the dozen area examples, but dang son, there is no ceiling price bracketing available for any comps and the borrower is 98% ltv if not greater with no cash contribution, no contingency, nothing but credit. These agents never learn, there is a ceiling and there is a floor. Cash moves the market, not credit. The new ninja is simply a disregard for price caps and everyone is drinking the cool aid all over again. Rates need to track upward and they need to do so right now. I guess I’ll expand the research area slightly just to see. Remarkably aggressive sellers agency and roll over buyers agency is the new norm I guess. Like just dump it on the appraisers desk. Bid high on the sale to secure the deal in a market of high competition, and then we’ll let the appraiser tell us what the price really is. No fair, how do you handle those scenarios?

    • I report it like I see it. If the value isn’t there it’s not up to us to make it work out. I’m hoping that I am educating the agent through my office visits that listings need to be priced to the market and not to what a seller needs to get out of the house.

  2. Here is another red flag during a home appraisal that the homeowner should be aware of. If the appraiser opens your fridge and asks if he or she can eat some of the leftover meatloaf, that is a big red flag. If the appraiser does this, do not panic, offer some ketchup and a robust red wine with subtle tannins (maybe a Zinfandel). While the appraiser is eating, feel free to talk to them about why you love your home and how your son-in-law installed an attic fan two summers ago, but avoid direct eye contact. When the appraiser is done, don’t make any abrupt movements or show any signs of anxiety. If the appraiser would like to continue viewing your home, let them, but watch watch carefully because the appraiser you got is crazy and their final value opinion is the least of your worries. Just having fun Tom, thank you for all you do for the profession 🙂

    • Yep, that would be a red flag! Although you’re just having fun I have a feeling this probably has occurred before. Lot’s of crazies out there. 🙂

  3. Nice job Tom. It’s really helpful when agents are proactive about telling the story of the property to the appraiser and focused on being accurate of course with the basics like square footage. An appraiser’s “spidey sense” might be tingling as you said, though maybe there is a reason why the property is in contract above anything else. Tell the story of the property and be honest. That’s often my advice to agents. Another good one. Keep up the great work!!

    • Thanks Ryan. Yeah, I agree, if the value is legitimately there tell the whole story. Provide support for the list/contract price by including all relevant information.

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