How accurate are bank appraisals?

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delrinson
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How accurate are bank appraisals?

Post by delrinson »

I would assume that, especially after 2008, bank appraisals are fairly accurate, perhaps erring on the conservative side. Back in 2015, we took out a HELOC. Our anecdotal sense of things was that our house might be worth 550. The appraisal (drive by) came back at 645. My wife exclaimed, "There's not a chance that that's right," to which I responded, "Seems like a bank appraisal is a more reliable guide to the value of our house than our sense of what houses are selling for."

We're about to do a refi...with the same lender with whom we have the HELOC. Housing prices have certainly gone up in the intervening 4.5 years. If the 645 was a reliable figure, we should be somewhere over 700 these days. But both of us are convinced that 620 or so is the most we could expect.

I realize lenders are motivated to make the numbers work, and thus push for higher appraisals. But, in this post financial crisis era, it just seems that appraisals are likely to be fairly reliable...at least more so than my wife's and my collective hunches.
smitcat
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Re: How accurate are bank appraisals?

Post by smitcat »

delrinson wrote: Sun Mar 15, 2020 7:49 am I would assume that, especially after 2008, bank appraisals are fairly accurate, perhaps erring on the conservative side. Back in 2015, we took out a HELOC. Our anecdotal sense of things was that our house might be worth 550. The appraisal (drive by) came back at 645. My wife exclaimed, "There's not a chance that that's right," to which I responded, "Seems like a bank appraisal is a more reliable guide to the value of our house than our sense of what houses are selling for."

We're about to do a refi...with the same lender with whom we have the HELOC. Housing prices have certainly gone up in the intervening 4.5 years. If the 645 was a reliable figure, we should be somewhere over 700 these days. But both of us are convinced that 620 or so is the most we could expect.

I realize lenders are motivated to make the numbers work, and thus push for higher appraisals. But, in this post financial crisis era, it just seems that appraisals are likely to be fairly reliable...at least more so than my wife's and my collective hunches.
In our experience bank appraisals are no more or less accurate than any other appraisal 'service' - they are usually 'in the ballpark' for fairly typical homes in fairly typical surrounding neighborhoods. Even with that criteria they are often off by a significant %. If the home is unusual in size, design and/or the property location and/or property size or makeup is unusual then property appraisals can vary to a much larger degree.
Concerning yourself with what a home may be exactly worth is quite impossible since it totally relies on what one person will pay for that exact home at one point in time.
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grabiner
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Re: How accurate are bank appraisals?

Post by grabiner »

Changes after 2008 bar lenders from doing appraisals directly, to avoid conflicts of interest. Instead, the lender contracts with a third-party appraisal service which has no incentive for the loan to go through. This is now replaced by an incentive to minimize effort, since the bank pays a fixed fee; you can often see careless appraisals in which the appraiser doesn't know enough about the area. (For example, when I bought my condo in 2013, one of the comps was three miles away, and wasn't adjusted for a neighborhood difference. A quick check of other sales in my neighborhood and in the other neighborhood showed that condos of the same size sold for 20% less in the other neighborhood.)
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oldfort
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Re: How accurate are bank appraisals?

Post by oldfort »

Bank appraisals can be self-fulfilling prophecies, at least as an upper bound. If you're in a market where almost all your potential buyers need a mortgage, then they're not going to be able to make an offer higher than what the lender will give them.
lessismore22
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Re: How accurate are bank appraisals?

Post by lessismore22 »

I was in my friend’s house the other day while an appraiser was there for his refi. She flat out admitted they have enough info from the bank before they walk into the house that they know where the numbers need to be to make the deal work.
obgraham
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Re: How accurate are bank appraisals?

Post by obgraham »

My history of bank appraisals has been that they have always been low. Perhaps that is because my houses have usually had some unusual (call that "expensive") upgrades or design features. Banks are happiest appraising a house that looks and behaves like all its neighbors.
jcoll1
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Re: How accurate are bank appraisals?

Post by jcoll1 »

obgraham wrote: Sun Mar 15, 2020 3:15 pm My history of bank appraisals has been that they have always been low. Perhaps that is because my houses have usually had some unusual (call that "expensive") upgrades or design features. Banks are happiest appraising a house that looks and behaves like all its neighbors.
This has been my experience also. My house is a log home construction which makes it harder for an appraiser to work with. Having said that my thought was an appraisal for a loan would be on the low side because the loan collateral is the house. If the loan would go into default the bank would want to be in a good position to recoup the debt. A lower appraisal would result in a lower maximum loan available and less risk for the lender.
jcoll1
sergio
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Re: How accurate are bank appraisals?

Post by sergio »

I always assumed appraisals were there just to make sure the property exists and is worth something in the ballpark of the sale price.

Basically to avoid situations like my buddy Jose selling me an outhouse for $500k, and us walking away and splitting sik gainz after the bank pays Jose the $500k.
mega317
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Re: How accurate are bank appraisals?

Post by mega317 »

lessismore22 wrote: Sun Mar 15, 2020 2:15 pm I was in my friend’s house the other day while an appraiser was there for his refi. She flat out admitted they have enough info from the bank before they walk into the house that they know where the numbers need to be to make the deal work.
My house appraised for the exact value of our offer.
https://www.bogleheads.org/forum/viewtopic.php?t=6212
JonnyB
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Re: How accurate are bank appraisals?

Post by JonnyB »

grabiner wrote: Sun Mar 15, 2020 11:03 am Changes after 2008 bar lenders from doing appraisals directly, to avoid conflicts of interest. Instead, the lender contracts with a third-party appraisal service which has no incentive for the loan to go through.
This isn't the whole story. Dodd Frank in 2010 required the use of third party appraisers, but only for homes above $250,000. And in 2018 that rule was relaxed even further so that only homes over $400,000 require third party appraisers.

But third party appraisers don't remove all conflicts of interest. Just as for the scandals involving the bond rating agencies, the lender still gets to pick the appraiser and they aren't going to hire appraisers that don't give them the results they want. Lenders make money by closing deals, so they want appraisals that make the deal possible. Worse, they are paying them with your money.
HoopDiddyDiddy
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Re: How accurate are bank appraisals?

Post by HoopDiddyDiddy »

We had appraisals done by two lenders in Sept '19 while HELOC shopping.
One was ridiculously high and the other was ridiculously low- this to the tune of 40% difference.
The high number was provided by a local appraisal service familiar with my neighborhood while the low number was quoted by a guy that drive 60 miles from the next state over.
It was immaterial as we had 100% equity and any number would have been sufficient, but I found the enormous difference interesting.
sschoe2
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Re: How accurate are bank appraisals?

Post by sschoe2 »

If the house is in move in ready condition the appraisals are typically very good. If it is an as is handyman special type property that needs a lot of work the appraisals are often way high. My aunt has a tear down house in a desirable suburbs but in a flood plain and couldn't sell it. She came close with a short sale but the bank appraiser thought the land was worth $30k more than the offer so they refused. She had been trying to sell it for 3 years so she finally had to walk away.

Same deal with my late mother's house. It appraised for $299 in 2011 when she refi'd It sold in 2018 for $275.
CT-Scott
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Re: How accurate are bank appraisals?

Post by CT-Scott »

lessismore22 wrote: Sun Mar 15, 2020 2:15 pmI was in my friend’s house the other day while an appraiser was there for his refi. She flat out admitted they have enough info from the bank before they walk into the house that they know where the numbers need to be to make the deal work.
I've found this to be true of most of the houses we've owned (we're currently in my 4th). With our current house, both for when we bought it late-2008, and when we later refinanced mid-2013, the appraised values "magically" came in just barely above where they needed to be for the amount being financed.
obgraham wrote: Sun Mar 15, 2020 3:15 pmMy history of bank appraisals has been that they have always been low. Perhaps that is because my houses have usually had some unusual (call that "expensive") upgrades or design features. Banks are happiest appraising a house that looks and behaves like all its neighbors.
I've also run into this problem. The house that I grew up in and bought from my father was a raised ranch with about 5 bedrooms total, 2 of them in the lower level. The lower level was completely level with the outside on 3 sides, and on the front where it was partially below ground, it was still only about 50% below ground, so it still had full-size windows in the front. To anyone who went in the house, the lower level felt "above ground" yet when we later went to sell our house, the appraiser judged it to be a basement, and discounted the value of the lower level, including not giving "credit" for the 2 lower-level bedrooms, thus making it considered as a 3 BR house. This then resulted in the appraisal not coming in high enough for the buyer's bank. Because we already had a contract on another house, we decided to eat the difference and lower our selling price. In case this comes up again (which it might with our current house), I'd be interested in hearing recommendations as to how to better handle that scenario.

After we went through that experience, we swore to eachother that we'd never buy another raised ranch house. And yet, we somehow overlooked the fact that we may have the same problem with our current house, which would probably be classified as a contemporary split-level. This house has a MBR above grade, two bedrooms in the lowest level (walkout in the back, halfway below grade on the sides, and completely below grade in the front of the house. There's also a full bathroom in that lowest level. It also has a room just outside the MBR, which I use as my home office. It's considerably smaller than the other three bedrooms, and would need to share the MBR bathroom's shower (there's a separate 1/2 bath just outside of the room). It could be used as a 4th bedroom in a pinch, but would be best used as an office or nursery. I've sometimes seen (especially when we're talking about beach houses) houses with bedrooms on the lowest/basement level marketed as "upside-down houses."

So, I'd say this house has to be a tricky one for an appraiser. On the one hand, they might be inclined to "not count" those two bedrooms on the lowest level, but if they did that, then they'd have to call it a 1BR house (over 3000 square feet), or *possibly* a 2BR house (counting the too-small-to-be-a-legitimate-BR office). So I'm hoping that they realize that wouldn't make sense and count the two lowest level bedrooms. That's what they seemed to do when we bought it and later refinanced it.

Right now, I'm looking to open up a HELOC, and it sounds like most of the banks may only do drive-by appraisals for HELOCs (not sure if that's always been the case, or is more the case right now because of the coronavirus). That seems odd to me, since they still have to worry about your loan-to-value ratio, but per obgraham's post, I suspect that the banks usually want to find a way to make the deal work, especially if they think you're a low-risk for defaulting. In other words, I'm not sure they necessarily changed their ways that much since the 2008 crash.
Last edited by CT-Scott on Fri Mar 20, 2020 9:39 am, edited 4 times in total.
bsteiner
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Re: How accurate are bank appraisals?

Post by bsteiner »

They vary. The appraiser, and the budget for the appraisal, for an ordinary single family home aren't the same as they would be for, say, an apartment building, an office building, a commercial property, or a shopping center.
oldfort
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Re: How accurate are bank appraisals?

Post by oldfort »

CT-Scott wrote: Fri Mar 20, 2020 9:33 am So, I'd say this house has to be a tricky one for an appraiser. On the one hand, they might be inclined to "not count" those two bedrooms on the lowest level, but if they did that, then they'd have to call it a 1BR house (over 3000 square feet), or *possibly* a 2BR house (counting the too-small-to-be-a-legitimate-BR office). So I'm hoping that they realize that wouldn't make sense and count the two lowest level bedrooms. That's what they seemed to do when we bought it and later refinanced it.
Whether those below-grade rooms can be legally counted as bedrooms should be a function of your local building codes and not what makes sense to an individual appraiser.
CT-Scott
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Re: How accurate are bank appraisals?

Post by CT-Scott »

oldfort wrote: Fri Mar 20, 2020 10:07 am
CT-Scott wrote: Fri Mar 20, 2020 9:33 am So, I'd say this house has to be a tricky one for an appraiser. On the one hand, they might be inclined to "not count" those two bedrooms on the lowest level, but if they did that, then they'd have to call it a 1BR house (over 3000 square feet), or *possibly* a 2BR house (counting the too-small-to-be-a-legitimate-BR office). So I'm hoping that they realize that wouldn't make sense and count the two lowest level bedrooms. That's what they seemed to do when we bought it and later refinanced it.
Whether those below-grade rooms can be legally counted as bedrooms should be a function of your local building codes and not what makes sense to an individual appraiser.
Thanks. I'll have to press some realtors about this. I did just do a quick search and found some documents on my town's website, and see nothing suggesting that our lowest-level bedrooms can't be used legitimately as bedrooms. But I am pretty sure that appraisers apply a different square footage value for the area in the lowest level.
oldfort
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Re: How accurate are bank appraisals?

Post by oldfort »

CT-Scott wrote: Fri Mar 20, 2020 10:29 am
oldfort wrote: Fri Mar 20, 2020 10:07 am
CT-Scott wrote: Fri Mar 20, 2020 9:33 am So, I'd say this house has to be a tricky one for an appraiser. On the one hand, they might be inclined to "not count" those two bedrooms on the lowest level, but if they did that, then they'd have to call it a 1BR house (over 3000 square feet), or *possibly* a 2BR house (counting the too-small-to-be-a-legitimate-BR office). So I'm hoping that they realize that wouldn't make sense and count the two lowest level bedrooms. That's what they seemed to do when we bought it and later refinanced it.
Whether those below-grade rooms can be legally counted as bedrooms should be a function of your local building codes and not what makes sense to an individual appraiser.
Thanks. I'll have to press some realtors about this. I did just do a quick search and found some documents on my town's website, and see nothing suggesting that our lowest-level bedrooms can't be used legitimately as bedrooms. But I am pretty sure that appraisers apply a different square footage value for the area in the lowest level.
This might vary slightly between jurisdictions, but you can't call something a bedroom unless there's an adequate egress window. So you'll see requirements such as a bedroom must have a window that starts no more than 44 inches from the floor and must meet certain minimum dimensions. This is to avoid fire hazards.
michaeljc70
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Re: How accurate are bank appraisals?

Post by michaeljc70 »

As others said, it varies. If your home is very similar to other homes that sold recently, like in a subdivision, they will likely be more accurate. If your home is being compared to homes that have different styles, layouts, vastly different finishes, etc. it won't be as accurate. The appraiser won't be able to go in the comparables (generally) and is using an MLS listing, county data and pictures from the MLS listing (if they exist) to make a lot of judgements. Sometimes there are flaws in comparables that aren't readily seeable/knowable by an appraiser like noise due to a school, train, highway, etc. or terrible layout that an in-person buyer would notice right away. Things such as positioning in the neighborhood or even the block can change the price. Also, they try to use newer comparables but that isn't always possible and prices can change in even a few months (especially if a recession hits or ends).

Appraisals are to establish that the purchase price is reasonable not an exact amount someone would pay. As long as you get the loan I wouldn't put to much thought into the appraisal beyond that.

I don't know if anyone has studied this, but I would guess if you had 10 appraisers appraise a house they would all be different maybe by as much as 10%-15% depending on the property. I have heard of people hiring multiple appraisers when dealing with an estate and one beneficiary wants to keep the property and buyout the others and using the average.
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