Ok, today we will tackle another favorite of mine in the continuing series “the price is right” AKA “the mystery of appraising”.
This I know; Appraisals have three valuations (or wild guesses) they are:
Sales Comparable Approach
Cost Approach
Income approach
Yesterday we discussed Sales Comp approach and the declining market or there of…..
No one really has a clue as to how this works; kinda of like a TV without a remote control clicky thingy.
The story.
Have a nice home 1800 sq ft, 2/2 with a garage (in a depressed Hood) and it’s listed under a 100k.
In Mee-am-mi this makes it one of the lowest priced homes known to mankind (outside of a 25k deal we are trying to close this week but that home is Especial) so I get it under contract at full price and here comes the appraiser…….
Me; “What do you think, Ace?”
Ace; “We’ll see”
Me; “Oh well there goes this deal”
Ace; “Huh?”
“We’ll see” never leads to anything positive in Real Estate.
Ace comes back at 82k, now remember that this home is in good shape, 1800 sq ft and has 2 bedrooms 2 baths and a large 1 car garage….in front of a park!!!
On this appraisal, Ace doesn’t even ATTEMPT to use the Cost (as built ) approach………wanna know why?
Cause he knew that building this home “as is” (termites and all) for under 200k was impossible even with our abundance of illegal labor!!!!!
So to keep it clean they simply “omit” this little point; how would you explain this small discrepancy to the underwriters?
“Well you see that the home is worth 80k but to build it would cost over 200k and you know that with the market in the third moon of Jupiter”…………another WTF moment!
All my recent appraisals have comped higher in the Cost approach, even when depreciation is factored in (which is a big ugly number)
It’s a shame that sellers have no recourse, but as I’ve mentioned before Appraisers get paid either way and lenders NEVER lose….
Monday we’ll have a positive story; titled “Hey, do you know where my square footage is?”