The Alabama IFA forum, created by Cliff Odom, RAA, IFA of Appraisal Services, Inc., got into an interesting discussion after I posted a Friday Chuckle link to a mortgage broker's video and this comment:
"This mortgage lender has heard of appraisals coming in "short" but it's never happened to HIM!"
Scott Austin of Birmingham, AL posed these scenarios:
The agent on the video said he had never seen it happen. The agents I talk to say the same thing. To put the probability question in context lets look at the three alternatives assuming an impartial and honest valuation process:
- The appraised value will come in above the contract sales price.
- The appraised value will come in at the contract sales price.
- The appraised value will come in below the contract sales price.
Again, based purely on probability, what percentage of the time will the appraised value come in below the agreed upon (contract) sales price?
Greg Hartley, Blue Moon Appraisals, Birmingham, AL decided to take on that assignment!
To properly answer your question we must put it in the proper perspective concerning appraisal methods.
- The Crankdown Method of valuation
- The Forced Extraction Method of valuation
- The Ahkrap Method of valuation
What? You say you can't find those methods in your appraisal text book or literature?
First, there is the Crankdown Method. Practitioners of this method, finding no appropriate comparable sales, will choose the sales that are superior to and have sales prices that exceed the sales price of the subject property by an amount proportional to the amount of the negative adjustments necessary to make the reconciled appraised value come in just above the sales price of the subject property.
In effect, they are "cranking down" the sales price of the comparable sales to the sales price of the subject property. This method seems to produce the highest delight quotient in young and inexperienced appraisers and is a favored method of loan officers.
Second, we will look at what I like to call the Forced Extraction Method of Valuation. Under this method, the appraiser inspects the property, notes all salient facts and features of the property, returns to the office, calculates the GLA, and does a search for comparable sales.
Not finding any comparable sales because the subject property is an 1,100 square foot, 2 bedroom, 1 bath home on a crawlspace and all sales in the area are 1,800 square foot, 3 bedroom, 2 bath homes on basements, the appraiser proceeds to reach deeply within a dark orifice and with a loud, distinct, popping sound, forcibly extracts the value, hence the name of the valuation method.
This value miraculously lands at the adjusted sales price of the middle comp which is exactly the sales price of the subject property. While this method normally produces the desired results and is repeatable under laboratory conditions, it is the leading cause of rotator cuff and lower back injury among appraisers.
Third, there is Ahkrap Method of valuation. This method is the least desirable because it produces the highest level of loan officer anxiety and undue consternation because this method normally yields a final value opinion that is below the sales price, or the owner's estimate of value, of the subject property.
Using proper methodology, the appraiser actually pays attention during the appraisal inspection and makes note of all defects, damages, and items of deferred maintenance in the subject property. Selection of appropriate comparable sales and application of market driven adjustments for differences are a hallmark of this valuation method.
The name of this method comes from the distinct, guttural emanation of the appraiser when the realization is made that the appraised value falls below the sales price.
While this method uses generally accepted appraisal practices and is highly USPAP compliant, it is a dangerous method due to a high volubility factor when it comes in contact with the commission-driven loan officer. Great care should be taken when using this method of valuation.
Now as to probability, we don't have all the necessary variables to plug into the equation.
We can look into some formulas but each appraiser will have a different formula and there may be some that will have to be derived by observation and a liberal dose of the scientific method.
For instance, lets assume in this example an appraiser who has a beach-front condo, a ski boat, a home in XYZ subdivision, two Suburbans, 3 kids, and a stay at home wife.
The formula for having the appraised value equal or exceed the sales price or owner's estimate of value would probably be something like:
Loan Officer's DCL* (*Desire to Close the Loan) = Appraiser's(monthly bills + spending money) x Remainder of Life / Desire to not declare bankruptcy
Obviously, using this formula each side must balance. The fewer toys the appraiser has, or the more outside income the appraiser has, the better the appraiser will tolerate a high loan officer coefficient. The only way to lower the loan officer coefficient is to make loan officers compensation fee or salary based or make them subject to mandatory licensing.
Author: Greg Hartley, Blue Moon Appraisals, Birmingham, AL - email - Phone: 205 823-5150
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