Buying first home - do we need appraisal?

[gbbi_977]

Hi everyone,

We made an offer on a condo which was accepted last week. Closing next Friday. I've just seen our attorney's request for modifications to the contract, and he's included an appraisal contingency (to wit: This contract is contingent upon the property appraising out in an amount equal to or greater than the purchase price pursuant to an appraisal obtained by Purchaser’s lender on or before the mortgage contingency date. In the event this is a cash transaction, the contract is contingent upon the property appraising out in an amount equal to or greater than the purchase price pursuant to an appraisal obtained by Purchaser from a third party)

The sale is being treated as a cash transaction (private mortgage from father in law).

Our attorney is advising us to get an appraisal. This might be a stupid question, but is an appraisal necessary?

- we negotiated a purchase price $24K below the price they planned to list it at this summer (it's for sale by owner, from our current landlords - we already live here and love it)
- the price per square foot is no higher than anyone else has paid in the building (condo of 21 units) in the last 2 years
- the price per square foot is significantly higher than what people were paying in 2009, when bargains were around for the taking
- the price per square foot is significantly lower than what people paid in 2006 (current owners paid $279,000 in 2006; were planning to list for $259,000, we are purchasing for $235,000)

Thoughts? Is it ridiculously risky/unwise to forego an appraisal, even if we're super confident it's a good price and our lender is not asking for one?

Thanks!

[math-ya]

As long as you got an inspection I don't see the issue. It sounds like you did about the same due diligence as an appraiser would have. your comps sound solid. But I'm just wonderin how much this appraisal would cost?

[Another Reader]

I'm not sure you know what the fair market value of this property is.

What things sold for years in the past is not relevant.  Markets change.  Being between the low point and the high point of the last decade does not mean you have determined current market value.  What an owner lists a property at is also pretty worthless information.  There's a saying in real estate: "Sellers set price, buyers set value."  Sellers can set very unrealistic prices and the property can sit without selling.

The property was not exposed to the market, and you are more likely than the average buyer to want this property because you already live there.  That means you may pay more for the privilege of not moving.  The seller has also avoided any improvements that may have been necessary to sell the property on the open market.

The statement that is most telling is that the price per square foot is no higher than anyone else has paid in the last two years.  What do you know about the other sales?  Do they have better or worse locations?  Were they remodeled at the time of sale?  Were they bigger or smaller?  You have to adjust the price of each of the sold properties for any way that property differs from yours to make the sale useful for comparison.

Your attorney has made a suggestion that would protect you from overpaying.  However, if you have already written the contract and put up earnest money, the suggestion may be too late.  If not, in your shoes, I would obtain an independent third party appraisal.  I would also consider offering less than that amount, as the seller is not paying commission or doing repairs.  Finally, I would hire a home inspector to look for problems with the property.   A rational analysis of the structure and systems may suggest a price reduction for needed repairs.

[arebelspy]

AR gives good really advice.

If this is your first home purchase, yes, I would be going through all the proper steps (inspection, appraisal, etc.).  Once you feel comfortable skipping them, to where you don't need to ask if you can do so or not, that's a different matter.  A condo appraisal is cheap.  Peace of mind, if nothing else, and if it comes in low, you can use that to renegotiate.

[johnhenry]

If this was a deal in my hometown where I knew the local market inside and out.... I'd pass (EDIT: on the appraisal, not the deal).  But AR makes very good points.

Appraisals, even when done by a professional don't mean much to me.  As a RE investor, every time I have to pay for one where a lender is involved, I roll my eyes because (even after the correction resulting from the negligence during the housing bubble creation), the appraisal comes in just a hair above the contract price.  I always ask my loan officer.... what good is the appraisal that you demand to cover your risk (and make me pay for) when you disclose the contract price to the appraiser!?!?  I always offer: "Since I'm paying for this, why don't we order the appraisal from your preferred company, but not tell them the contract price.... to see how good they are at their job. And get each of us a meaningful number."  They never have a good answer.... but the obvious answer is: without knowing the contract amount, appraisals would be all over the map, and unless appraisers wanted to purposely err on the side of over-valuing (which wouldn't be in the interest of the lender) ... the result would be an increasing number of cancelled loans and contracts because the appraisal value was lower than the contract amount!! 

If you do get an appraisal, please don't disclose the contract amount!!

I've also (nearly) been burned as a seller.  I bought a starter house in a solid blue-collar hood for $56K.  Lots of elbow grease, rehab, DIY improvements, and 6 years later I listed it FSBO for $72K.  Got an offer and a contract for $72K.  Appraisal came in at $63K.  I spent the time to provide my own comps, wrote a letter to the appraiser and the lender of the potential buyer, listing the comps and asking for a re-appraisal/adjustment and got them to adjust their appraisal to $72K.  By that time, the first time potential buyers walked.... definitely scared off by the low appraisal price.  They probably thought I was trying to gouge them and may have been relieved that the appraisal saved them from overpaying by $9K.  At the time I was so furious with the appraiser that I could not see straight!!  I was told by the lender to the potential buyer (before the re-appraisal) that since this appraisal was done as part of an FHA loan, it would stand for 6 months for anything involving FHA or VA.  Even if another buyer (in the FHA or VA program) came along, the lender could not choose another appraiser or get another appraisal until that one expired in 6 months.  So if the adjustment hadn't been issued, I would have really been screwed.

I wound up selling about 1.5 months later for $71K.  The appraisal came in at $73K.... surprise surprise.  The original appraisal of $63K was of course very professional, had comps that averaged out to $63K.  But in a 1.5 month period I had two buyers willing to offer $71K.

I'm not saying that appraisers are inept or corrupt or that a single appraisal is completely worthless.  I think the value in a single appraisal comes from the details of the comps, not the "final number" given by the appraiser.  But that requires you to "dig into" the comps and see how they stack up against the property in question.  But in my opinion the only way to get a reliable estimate is to take the average of at least 5 appraisals done by appraisers who don't know the contract price!!  Since that's obviously not cost effective, I'd look for some other way to be confident the place is worth what you are paying.

[math-ya]

i agree with john henry. I worked as an appraiser for one of the biggest business appraisers in the country for about 2 years.  what i saw was really messed up. every single business that we would appraise was total bs. we did all this 'work' to make it seem like we were doing an honest appraisal of the business. but in the end we would just give them the same number that had last year +- a few dollars.  the whole thing is a really expensive joke. but their insurance guys always demanded it, so they had to pay, and didnt get any real value from us. if the business was being sold, we would find out the contract price one way or another and get close to it
you are in a situation where you dont have to deal with the extra bs bureaucratic red tape. if you can do their job better than them, why would you pay them to do it? how well are they going to look into comps? cuz every appraiser i know comps properties by square footage, # of rooms and bathrooms, and maybe an outside pic. you cant make a great appraisal number based on such few things. you have to go inside! duh! if your appasier had toured each recent sold comp, they could give you a much more accurate number. have you been in these units? can you make a more informed appraisal then them?
even if the appraiser comes in with a lower number, is the seller going to be willing to lower their price based on that info? as a seller i certain never would. b/c i think i know my neighborhood better than any appraiser.
 let us know what you end up doing, especially if you go thru with it, im interested to see if the price magically comes in right on target

[johnhenry]

Glad to hear the same thing from someone on the inside!!

I hear exactly what you are saying about needing to go inside.  On the appraisal matrix with the comps you see all these fields like sq footage, # of rooms, paved drive, garage, etc. and dollar amount adjustments for those things.  But when you read the final comparison, it seems to me that the appraiser is (often) ignoring the interior finish/quality or the desirability of the neighborhood.  For example the house I sold for $72K was on "the good end" of a neighborhood.  All the houses "on that end" consistently sold for $65-85K, while houses all the way "on the other end" sold for $40-$65K.  This appraiser just weighted his report with houses from the other end of the neighborhood, which is how he wound up at $63K.  It's true that a half mile away a house of that size would sell for $63K, but it's also true that a half mile in the other direction it would sell for $83K.  But what's an appraiser to do if all the comps for that neighborhood in the last 6 months have been on the other end of the neighborhood??  (I think) instead of recognizing that important fact and expanding his comps in the other direction, he just used a disproportionate number from the other end of that same neighborhood.

On a side note it's interesting to think about the perpetuating effect appraisals can have on RE prices (in either direction).  I was in a position to be able to wait and sell my place for what I thought it was worth, and what it proved to be worth.  But what if I had been moved out of town for work, or in trouble financially??  That $63K appraisal could have easily forced/motivated other sellers to accept that amount or close to it.  Then my house becomes the most recent comp for the next sale in that neighborhood.  And so on.

I'll be the first to admit, I wouldn't want to be an appraiser (unless I could know the contract amount).  There are just so many variables!!  It's not surprising that the first thing an appraiser does is get the current contract amount to have a target!! 

As an investor/buyer the first things I find out are how much the place last sold for and/or how much it's listed for at the tax office and what year it last sold.  Sometimes there are photos at the tax office showing the property when it last sold.  That can't tell the whole story, but that info, combined with a knowledge of how RE prices moved locally during that time between then(last sale) and now is useful.  Combine that with information in the listing about major upgrades, renovations and you can piece together whether those major things were done before the last purchase, or after and thus whether they should be reflected in a higher price. From there, I do sometimes look at actual comps (similar homes sold in the last 6 months).  But I think it's just as helpful to just look at similar homes that are still on the market.  It's safe to assume that (on average) RE agents are listing them for 10-20% more than they will likely sell for.  In your market, you can confirm/adjust that number by looking at what places got listed for vs. what they sold for.  That info, combined with how long those homes are staying on the market, is worth more to me than one professional appraisal. 

There's no reason to not retain a buyer's agent.  As long as you can trust them to shoot straight with you, I'd trust their informal "appraisal" as much as a professional one.