You know one of the things loan officers and processors really have a hard time explaining to a borrower is how is it possible that an appraisal done today has a lower value than the one they had done a year ago – especially when it showed overall sales prices were increasing.
This is a tough one that is difficult to explain to a borrower. The section of the appraisal that reports information on the neighborhood is referring to the entire market area, not the Subject specifically.
The purpose of this is to provide the lender with a clear and accurate understanding of the market trends and conditions prevalent in the subject Neighborhood.
Whether the market is stable, increasing, or declining, the appraiser must use the most recent and similar sales to determine the current market value of the Subject, not the entire market area.
Here’s a Real World Example
Let’s say I recently appraised a home in Philadelphia. I’ve selected 4 comps that have sold in the last 3 months. They have a sale price range from $200-225K. The final value I’ve determined to be is $215K. I submit my report.
Then, I get a call from the lender explaining that the borrower had an appraisal completed a year ago with a value of $230K. They send me the report to review. I see there were 4 Comps used, all sold 12-18 months ago. The sale price ranged from $215-240K. The sales were current at the time of that appraisal, however they are not today.
If I used those sales, they UW would reject them immediately and ask why I didn’t use the more recent sales that are available. The current comps that were not available 1 year ago, but are today, have a slightly lower sale price range–current market value for the Subject will reflect that. However, this does not indicate a declining market.
If the most recent comps sold for lower than the Comps available a year ago, it’s going to impact the value for the Subject specifically. The market may still be stable overall. Often times when we see this, the decrease is less than 10%. That’s not really showing a declining market, rather a minor variance in the most recent sale prices for properties similar to the Subject.
Another reason for this, and you’re not going to like it, is that appraisals are opinions. Most likely if there are 2 appraisals within 1 year of each other that differ significantly in value, chances are, they were done by two different appraisers. It’s possible their opinions of what sales were most appropriate to indicate value were different. It’s also possible one appraiser made a mistake and missed market data, or mis-measured the property.
When we come across that scenario at NAN, we review the reports against each other for discrepancies, errors, and differences. If both reports appear accurate and supported with the only difference being their comp selection, we suggest ordering reviews for each appraisal to determine if one is not credible. I know it’s hard to believe, but the appraisal with the higher value is not always the supported one.
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