Fighting a “Low Appraisal”

A friend of mine, who is an agent, called me the other day complaining about an appraisal that was completed on one of her listings. The appraiser (from a neighboring county) arrived at a value almost $45,000 under the contract price. She asked me if I could take a look at the appraisal and provide any insights that I might have.

It’s not unusual for values to come in lower than the contract price; and we all know that value and price are two separate things. However, there was such a large discrepancy, it warranted a closer look. After reviewing the appraisal, I did notice some issues that were of concern.

I recommended that the she ask for a Reconsideration of Value. A Reconsideration of Value is a formal request submitted to the lender asking their appraiser to consider additional information and/or sales data that might aid the appraiser and cause them to change their opinion of value.

Here are the steps that I suggested she take:

  • Go through proper channels.  The appraisal is the property of the Lender who ordered the appraisal.  You will have to submit your request for Reconsideration of Value to the Lender, usually in writing.  The Lender will then decide whether or not the request has merit.  If so, they will forward the request to the appraiser for review and response.  Do not contact the appraiser directly.  Remember that the appraiser’s client is the Lender; not the agent, the Seller or the Buyer.  The appraiser can’t act on your request or revise his report without permission from his client, the Lender.  Please note that the Lender can use their discretion and may deny your request without even presenting it to the appraiser.
  • Practice the 3 “Ps”.   Be Proactive – initiate the request promptly.  Be Professional – don’t get bogged down in personally attacking the appraiser or his skills, present your case in a professional, well-supported manner.  Be Polite – appraisers are people, too.  Really, we are.  You will get further with your request if you simple practice good manners and politeness.
  • Support your request with good sales information and insights.  Simply saying that “the value is not high enough” will not cut it.  Be prepared to provide additional comparables and explain why they are more appropriate that those used in the report.  If you have comments about the comparables used in the report, be specific and detail exactly why the comparable used in the report was not the best one available.  If you work frequently in a certain market and have intimate knowledge of sales in the area, use that information to support your point.  “Comp 3 was a nasty divorce situation and they needed to sell quickly.” Or “Comp 2 is actually 500sf larger due to a finished attic that is not noted in the public records.” Good, well-supported information will go a long way.  And, if you are going to provide additional sales, make sure that they are truly comparable.  Don’t just look for sales that will support your price. The appraiser and the Lender will see right through that. If your property is 3 bedroom Rancher, don’t include the 5 bedroom Colonial as a comp, even if it is located across the street. They’re just not comparable.
  • Be Specific. If you want to know why the appraiser made or did not make a certain adjustment or did or didn’t use a certain comparable, address it directly and specifically in your request. “Can the appraiser explain why he only made a $5,000 adjustment for the subject’s inground pool?” Or “Why did the appraiser elect not to use the sale at XXX Main Street, one block away?”
  • Keep it Short & Sweet. Don’t write a novel. Don’t get emotional. Get to your point, present your case coherently and concisely, provide supportive information and then, move on.

I hope these steps will help you if you ever find yourself in this kind of situation. Should you ever need any assistance with contesting an appraisal or submitting a Reconsideration of Value, please feel free to contact our office. We will gladly do what we can to advise you.

The Coyle Group, LLC is a Residential & Commercial Real Estate Appraisal firm serving the Greater Philadelphia Region and New Jersey.  215.836.5500

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What is an Absorption Rate?

The Absorption Rate measures the relationship between a real estate market’s supply and demand.  The total number of available homes (inventory = listings and pending sales) is divided by the total number of homes sold in the previous month.   The resulting number represents the number of months it would take, at that same pace, to sell the entire inventory of homes.  It this does not take into count the number of houses which will eventually come on the market in addition to those already for sale.

Knowing your area’s Absorption Rate (AR), can help you track trends.  Understanding your market and where it is headed is very important for both sellers and buyers.  It allows buyers and sellers to understand better why some homes may sell faster than other and to develop effective pricing strategies.

Calculating an AR is not difficult but you will need access to the following information:

  • How many listings are currently on the market in a given area? Be sure to include both active and pending homes.
  • How many homes sold last month?

Once you have those numbers, you will need to:

  • Add the number of Active/Pending Listings together
  • Multiply the number of homes Sold Last Month by 12.  Then, divide that number by 52 for the weekly number of homes sold.
  • Then, divide the number of Active by the number of sold per week
  • This will give you the weekly AR.  For a monthly AR simply divide the weekly AR by 4.

Here’s an example for Montgomery County.  In November 2011 there were 554 settled sales.  Currently, there are 4,481 active listings and 230 pending sales.

Listings + Pendings = Actives

4481 + 230 = 4711

Homes Sold  X 12 = Annualized Sales

554 X 12 = 6,648/52 = 127.85 Week

4711 / 127.85 = 36.84 Weeks

36.84 Weeks / 4 Weeks per month = 9.21 months of inventory

The result is an Absorption Rate of 9.21 Months.  What this really means is that it will take 9.21 months for the market, at the current rate, to absorb the current inventory of homes.  This assumes that no new homes will be added to the existing inventory.

One good thing about absorption rates is that they can be tailored to specific neighborhoods and price ranges. So how can an absorption rate study assist buyers and sellers?

Narrowing an absorption rate study to a certain type of home, in a specific neighborhood, at a particular price point, enables a buyer or seller to first determine the nature of their local market (is it a buyer or sellers market) and then establish a listing or offer price, accordingly.

For instance, in Lower Merion, the overall AR for the township is 8 months.  However, if we take a look at the luxury market within Lower Merion (homes over $2MM) we see a very different picture begins to appear.  The luxury market currently has a 44 month inventory.  Meaning if you have a luxury home in Lower Merion, it could take over 3.6 years for you to sell it.  This could be a problem for someone who needs to sell quickly.  In this case, having the AR could prompt the seller to rethink their asking price.

Once we know the AR, we can determine what kind of market we are in.  That information can then be used by sellers to price their homes more effectively and hopefully reduce days on market.  For buyers, this information can help you determine if you are in a Buyers or Sellers Market and to structure your offer, accordingly.

Buyer’s Market: Over 7 months of supply
Balanced Market: 5 to 7 months of supply
Seller’s Market: Less than 5 months of supply

The AR is not the only thing you will need to determine a market’s condition.  Specific property features, condition, location and of course price will typically be more important in determining how fast a property will actually sell than any statistical formula.

If you have any questions about Absorption Rates or need assistance calculating the AR for a specific market or property type please feel free to contact us through this blog or email us at appraisals@coyleappraisals.com

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Another Reason to get a Pre-Listing Appraisal

Just the other day, I received a phone call from a Mortgage Broker friend of mine. Yes, appraisers and Mortgage Brokers are still allowed to be friends.

He wanted my input on a situation in which one of his former clients found themselves.  Let’s call them the Utley’s. (For the privacy of the parties involved, I will not use the actual names, streets, pricing or house photo in this post.)  The Utley’s currently have their home listed for sale in Springfield Township, Montgomery County for $345,900.  There home has been on the market for 39 days and they have an offer on the table for $339,000.  The Utley’s are concerned about whether or not they should accept an offer this “low”.

I began buy pulling up the information on the Utley’s home in the MLS and public records.  It is a nice 1939 colonial with three bedrooms, 1.5 baths, approximately 1,500 Sq.Ft.  A very common home in this area.

Then, I took a look at the sales and listing activity in the immediate area for similar homes.  What I found was surprising.  The last three sales in the neighborhood in the past year sold for $370,000, $370, 000 and $412,000.  There are currently two competing listings in the neighborhood listed for $370,000 and $469,900.  The home listed at $469,900 was a larger, four bedroom that was completely renovated, probably not the best comparable.

However, there was also one pending sale right around the corner from the Utley’s.  This house was last listed for $339,900 but, it lacked a powder room and was roughly 220 Sq.Ft. smaller.  It had also been on the market for over 160 days with an original list price of $364,000.

After looking at this information, my question to my Mortgage Broker friend was “why did they list it so low?”

By listing at $345,900, the Utley’s are basically telling the market “Hey, this is my pie-in-the-sky, hope I can get it number…but, I am probably willing to take less!”  The reason they are receiving “low” offers is because they apparently under listed their home, based on available market data.  They (and their agent) may have shot themselves in the foot.

To compound the issue, it turns out, the Utley’s agent is a “friend of the family” (probably not for much longer after this experience) that is a licensed agent but, who is not very familiar with their neighborhood.   In the end, the Utley’s may be leaving thousands of dollars on the table or may have to re-list at a higher price.

This is a perfect example of why Sellers and Agents need to have a Pre-Listing Appraisal completed prior to listing a property.  A Pre-Listing appraisal can assist Sellers and their Agents maximize their selling price without over or under pricing.  If the Utley’s and their Agent had an appraisal of the home done prior to listing they might have developed a different price point and might not be in a situation where they are entertaining such “low” offers.

For information on The Coyle Group’s Pre-Listing Appraisal services, please call our office at 215.836.5500 or visit this link.

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Tax Appeal Deadlines

We received a question today that was posted to our Ask PAB! page.  The question was a simple one but very important if you are considering to appeal your tax assessment.

“How strict are the deadlines for county tax assessment appeals?”

Simply put, they are very important.  If you miss the filing deadline you miss your opportunity to reduce your assessment for another year.  No excuses, no second chances.  In fact, not filing on time could cost a property owner thousands of dollars in unnecessary taxes.

The deadlines for the counties in the Philadelphia region are as follows:

  • Berks County, August 15, 2011
  • Bucks County, August 1, 2011
  • Chester County, August 1, 2011
  • Delaware County, August 1, 2011
  • Lehigh County, August 1, 2011
  • Montgomery County, September 1, 2011
  • Philadelphia County, October 6, 2011

If you are filing an appeal this year, we strongly recommend filing in person at the county assessor’s office.  When delivering your documents be sure to request a receipt from the clerk.  This creates a paper trail that shows when you filed and who took receipt of your documents.   If you are mailing your documents send them certified mail, so that there is a record of them being received.  The counties receive thousands of appeals each year and sometimes things fall through the cracks.

When filing be prepared to pay any necessary filing fees.  The fees will vary from county to county.  For any fees that pertain to your specific county we recommend visiting the Assessor’s website or calling their office.

You should also note that if the filing deadline falls on a weekend the assessor’s office may move the deadline to the following business day.  Again, this is something you should verify with your county’s assessor’s office. 

The appeal filing must be completed with appropriate documentation and fees no later than the end of business on the deadline date.  However, that does’t mean that you can’t file days or weeks prior to the deadline.

If you have any questions about tax assessment appeals please contact our office.  We will be glad to assist you.

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Land to Value Ratios

The Coyle Group - Land - Philadelphia Appraisers

We received this question from a local Realtor concerning land to value ratios as they relate to the appraisal process.

“I remember hearing percentages thrown around with regard to land value vs house value in appraisals for conventional financing.  Is it true that the land can only be worth a percentage of the total price being paid and if so, what is a good percentage/number to be working with as a rule of thumb?”

Great question, thanks for submitting it.

As for the land to value ratio, there really is no number set in stone by appraisers or the appraisal profession.  From an appraisal point of view the land value will be based on comparable sales and the Highest & Best Use of the land.  In some cases, the land value will comprise a large part of the overall value of a piece of property.  This will depend on location, permitted usage, etc.  An example of this would be down the Shore where the land value makes up the majority of the of the total improved value a given property.

From what I understand, the idea of a percentage is something that created by loan underwriters and evolved out of the Great Depression.  At that time, the old home loan organizations lost millions making loans on vacant parcels.  Now, when the market goes south, the last thing a bank wants to have in it’s portfolio are loans on vacant land.  Vacant land is the one of the hardest things to get off the books in a down economy.  Hence the 30% rule grew as an arbitrary benchmark.  If the site value was more than 30% of the total value of an improved property, the property was considered to have too much land.  This is also why many lenders will not touch unimproved land for lending.

That being said, generally speaking, most loan underwriters are looking for a land to value ratio of 30% or less.

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Mount Airy Trends

Being located in Erdenheim, just outside the city limits, we are frequently asked to appraise properties in northwestern Philadelphia, especially Chestnut Hill, Mount Airy, Roxborough and Manayunk. 

The other day we received our first question for the Ask PAB! section of the site.  It was submitted by a local agent who works primarily in the northwest section of Philly.  She typically deals with entry level and first time buyers.  For that segment of the market, Mount Airy offers a great selection of housing options for her clientele, in a wide range of price points and design styles.   It has very appealing housing stock, access to transportation, shopping, proximity to Center City and the suburbs and very unique community atmosphere.  Her question was simply:

 “How have Mt. Airy twins and rows been performing over the past couple of years?”

Below is a chart of the sales of 3-4 bedroom twins and rowhomes in Mt. Airy from January 2008 through December 2010.  Click on the chart to enlarge.

The blue dots indicate the sales of 3 bedroom homes; the red dots represent the 4 bedroom sales.  Our sample produced 341 sales of 3 bedrooms and 105 sales of 4 Bedroom homes, in Mt. Airy, during that time period.  The green and yellow lines depict the linear sale price trends for 3 and 4 bedroom houses, respectively.

The trend lines indicate that both 3 and 4 bedroom homes are moving downward.  However, it appears as though the 4 bedroom properties are experiencing a deeper shift that the 3 bedrooms, which are riding a flatter trend.  This is likely due to the fact that there are fewer 4 bedrooms homes and, as a result, fewer 4 bedroom sales.  With a smaller sample, it is easier for a few sales to influence the trend.  Conversely, with a greater number of samples it is less likely that a handful of sales to move the trend so dramatically.

If you have a question about real estate markets and trends in the Philadelphia region, please visit our Ask PAB! page to submit your inquiry.

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Price vs Value

I was invited to speak at the monthly meeting of local Caldwell Banker Agents and Brokers. I was there to discuss the appraisal process, recent market trends and how the HVCC is affecting agents and their clients.

After speaking, I opened up the floor to questions. One of the first questions was a great one. The agent asked me to explain the difference between Price and Value. I’ve been thinking about it and have come up with the following explanation.

When viewed against the backdrop of recent marketplaces shifts both locally and nationally over the past few years, the difference between Price and Value has become more and more important to understand. In fact, I feel that most Agents and their clients are using the terms incorrectly.

When discussing a property most Agents and their clients are thinking in terms of price. “What is the price of the house”, “will they come down in price”, “that price is high/low” and my favorite “did the appraisal come in at the selling price?” The fundamental problem in these scenarios is that it is not about price, it’s about value. The focus should be on what the value of the home is, not the price. Value takes into consideration today’s market and underlying market conditions. Price often does not.

Price is a marketing tool. By setting a price, the Seller is actually choosing a segment buyers who will hopefully see the price as being the value of the property. The closer the Seller positions the price to the true value of the property, the larger the pool of potential Buyers the house will appeal to. Just the opposite is true, as well. The further the price is placed from the actual value of a property, the smaller the pool of buyers who will see that value.

An example of this was this property in Gladwyne. This property was listed in 2009 for $19,500,000. It was eventually withdrawn from the market. In 2010, it was re-listed for $17,900,000. All totaled, the house sat on the market for more that 660 days.

This is a situation where the Seller priced the house so far above the perceived value placed on it by the market, that they effectively diminished the pool of potential buyers to zero. This market did not support the price that was being asked

Remember value is guided by the market. Price is guided by the individual Selling the property. If the price is not supported by the market, no sale will occur.

Common perception is that price and value are interchangable. They are not. Value relates to what something is really worth.  That is, what could one expect to receive in terms of money in the free market?  It doesn’t matter what the value was last year, last month, or even last week. Value is determined by the conditions and influences of the current marketplace. Too often, sellers get hung up on that fact when the marketplace moves in the other direction. They don’t want to acknowledge the fact that their home was worth $800,000 a year ago and, based on supply and demand, is only worth $700,000 in today’s market. Value is determined by the scarcity of something and the ease of replacement with similar, equal, or better products or service (i.e. The Principle of Substitution).  In its most basic form, this is a simple function of supply and demand.

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