A Tale of Two Real Estate Appraisals

Before we moved into our first home last May, the house was independently appraised on behalf of our mortgage lender.  Last month, we were given a "Godfather offer" to refinance by the same lender - no closing costs, with an interest rate under four percent.  Once we realized the offer was not too good to be true, we said yes in a heartbeat.  As part of the refinancing process, a different local appraiser assessed the value of the house - for the second time in fifteen months.

This strikes me as a unique opportunity for an analysis and a case study, as not much has changed in the house (or the local market) over the past fifteen months, and because in theory, two appraisers should independently assess the value of the same house in the same way.  Superficially, this was the case, as both appraisals came in at the exact same value.  However, upon further review, it seems that each individual took a completely different approach to reaching that same number.  It may be useful for prospective home buyers to read this analysis, as a low appraisal can sidetrack a closing, and some of the findings below (in my opinion at least) imply individual variability across appraisers.

(Of course, it remains to be seen whether our refinance will close on time, as our loan processor this time around may be the dumbest idiot alive, but that's a complaint for a different audience at a different time.)

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First and foremost, both appraisers used the same method to assess the value of our home - the Marshall and Swift Residential Cost Handbook.  (It's possible they used different editions, as the website does not indicate how frequently the book is updated, and it's not the type of thing a person can purchase on Amazon.)

Using this guide, presumably the appraiser takes the following steps in determining the value of a home - I should mention here that I am not an appraiser, nor am I a real estate professional, so this is what I assume from reading both appraisals in detail:

1. Determining the "statistics" of the home itself (size, number of rooms, number of finished rooms, etc.) as well as the quality of the structure
2. Determining the size of the property itself
3. Analyzing the "context" of the home (neighborhood, trends in the local real estate market, etc.)
4. With items 1-3 in hand, they then look at comparable properties that recently sold in town or locally, weighting each of these homes' sales prices upwards or downwards, respectively, based on improvements or detriments with respect to the property being appraised
5. Finally, taking a weighted average (sometimes overweighting a house that may be especially similar to the house being appraised) of the recent comps in order to hit an actual value for the property being appraised.

Because the appraisals took place fifteen months apart, each of the houses used in the comparison analysis were different in each appraisal.  Here's what else changed between the two appraisals:

• We added a new, energy efficient central air conditioning system.  The unit we had when we bought the house was 25 years old and our energy bill last July was $400.  Plus, we suspected the unit was about to break.
• Based on our naivete as homeowners, we (probably) do a more amateurish job of general upkeep on the property than the previous owners.  It hasn't been enough for the neighbors to complain, but I think it's the case.
• The housing market in our area went sideways.  An identical home on our block sold for the exact same amount we paid, back in the spring - the house had a finished basement (our basement is unfinished) but our kitchen is much nicer (we think).  So that's more or less a wash.

So far, nothing interesting.  But here is what I mean when I say that the approaches that each appraiser took were completely different:

• The 2011 appraisal listed our home as about sixteen hundred square feet, while the 2012 appraisal listed it as over nineteen hundred (!!) square feet.  That's a huge difference - basically half the size of our basement.
• The 2011 appraisal listed our garage as a one-car garage, while the 2012 appraisal listed it as a two-car garage.  Our garage could not fit two Mini Coopers, even if one were parked on top of the other.  I am not sure how this mistake was made.
• The 2011 appraisal listed the house as being 54 years old; the 2012 appraisal listed the house as being 42 (??).  We should all be so lucky.
• The 2011 appraisal gave us $55 per square foot for our basement, but $0 for improvements.  The 2012 appraisal only gave us about half as much for the basement, but twenty grand for improvements (such as our fireplace, new central air unit, and patio).
• In assessing comparable houses, the 2011 appraiser docked each home a ridiculous $10,000 for not having a fireplace.  (Our fireplace is so small that our realtor warned us that burning more than one Duraflame log at a time would surely burn our house down.)  The 2012 appraiser was more realistic, assessing a fireplace as being worth only $3,000.

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In our instance, it is impossible to say which appraiser was "more correct."  After all, they came to the same conclusion.  However, it is clear that the 2011 appraiser was both more accurate and conservative with the size of the home.  On the other hand, last year's appraisal was far more generous regarding the value of the structure itself, allowing twice as much money per square foot for a part of the house (our basement) that is mostly unfinished and currently uninhabitable (unless you are an earwig).

This year's appraiser had the benefit of a house down the street that was identical and had recently sold for an amount just under the agreed, appraised value of our house.  It is possible that having a bad-ass kitchen (if I do say so myself) is slightly more valuable for a home than having a finished basement with no bathroom, as is the case for the house down the street.  More likely, though, the appraisers had different aesthetic tastes (as evidenced by the 2011 appraiser believing ludicrously that our teeny fireplace was worth ten grand), and these tastes impacted their assessments at a pretty fundamental level.

Given the variance mentioned above, I do believe we were fortunate that both appraisals came in at the same amount.  Had the second appraiser not asked me about recent improvements to the house - such as the new central air unit - it is possible that this year's appraisal could have been significantly lower than last year's.   For other people, a low appraisal could mean the difference between a relatively easy transaction and the whole damned deal going down the drain.

So, what would my amateur advice be for someone who is staring at an appraisal they disagree with?

1. Read the details of the appraisal and make sure you agree with them.  An appraisal should have a "Uniform Residential Appraisal Report" which lists all the pertinent statistics regarding the home, neighborhood, and market.  For instance, did the appraiser correctly estimate the size of the house?  Did they accurately state the age of the home?  In one of our appraisals, both of these pieces of information were off.  If you have evidence to suggest that the appraisal low-balled the house's size, or operated under the assumption that house was older than it actually is, it may be either correctable with the first appraiser, or worth springing the money for another appraisal.
2. Also in the "Uniform Residential Appraisal Report," there is detailed information regarding the comps, or recent local sales that the appraiser used to generate data for their analysis.  Take a close look at this information and try to understand the appraiser's underlying assumptions for the value of certain improvements (e.g., a larger garage, major appliances, finished basement, fireplaces and patio/decks).  You might catch the appraiser either undervaluing something that you have, or overvaluing something a bigger house has.  Don't think for a second that my fireplace is worth ten grand, and be skeptical about the assumptions that the appraisers make as well. 
3. Later in the "Uniform Residental Appraisal Report," there is a breakdown of how the value of your home is derived.  I've spent an hour trying to understand the formula, and it still doesn't make a ton of sense, to be honest.  But I can tell that liveable sections of the home, basements and garages are assigned different dollar values (on a per square foot basis, in my basis).  The 2011 appraiser felt that the livable spaces of the house were worth more per square foot than the 2012 appraiser; but the 2012 appraiser saw more value in my mostly-unfinished basement, assigning it almost double the value per square foot of the 2011 appraiser.  My point is, you may notice a systematic under- or overvaluation of these numbers, as well.

It strikes me that real estate appraisal is a highly inexact science, and there is great room for individual interpretation of a home's value.  As homeowners, we are all probably biased about the value of our home, especially if we have been living there for a while and have built lots of memories there.  Our lenders trust these independent appraisers to confirm whether they should give you a mortgage, so in my opinion it is our duty as consumers to hold appraisers accountable for the accuracy of their data.  As with every transaction, the devil is in the details, and hopefully my over-detailed analysis of our two recent home appraisals is helpful to someone out there.

DISCLAIMER: I am not a real estate professional, nor do I appraise anything professionally.  There is some chance that anything I have stated above may be fundamentally incorrect.  I have tried to be diligent to let you know when I am making an assumption in the above post - you should assume that everything I've written is an assumption, as a matter of fact.  Finally, I am sorry if this post bored you.  It is different from what I typically write about, I must confess.