Thursday, October 29, 2009

Ninth Bag Of Mail: Appraisal Accuracy

"Hi! This is Amy from House Of Allen. You have been so nice (and cool) to comment on my blog. I was wondering if I could ask you a question. We are refinancing to [build a] garage, sunroom, and porch addition. So, of course we had to have an appraisal for the mortgage company. My husband bought our 1,385 square foot home on 9.88 acres for $X [deleted for the protection of Amy's privacy] in 2001. It appraised for $X [113% of the purchase price]. Our appraisal just came in at a shocking $X [less than the purchase price]! Does that seem normal to you in this economy? I know you have no idea of our area, condition of our house, etc. But, there just seems to be a huge discrepancy!

I love your blog, glad I found you, and thanks for any insight you can give! : )


Amy from House of Allen.

This is a great question, Amy!

The short answer is, yes, this may be accurate. The economy has wreaked havoc on property values in certain parts of the country. For instance, the property that we're currently purchasing has dropped it's purchase price nearly 50% since being put on the market 24 months ago. Don't get too discouraged, though; things WILL eventually bounce back, and in the mean time you own a lovely home on nearly 10 acres. That's something to be proud of! Also keep in mind, that the appraisal isn't the actual value of your home necessarily, it's the appraised value. The taxable value, market value, and -- most importantly -- the homeowner's value (how much the house is worth to you) may all be different.

Unfortunately, the appraised value is important for you to be able to refinance, and it stinks that it's not coming in at what you would like. Why has this happened? Well, it might be because of one of these reasons:

1. One of the appraisals is inaccurate. Appraisers are generally not as specialized in specific geographic areas as Realtors are. Values can vary from street to street within a neighborhood, and often appraisers are assigned several counties. Ridiculous. It's impossible for them to be familiar with all of the idiosyncrasies of your community. If you dealt with a good Realtor during your 2001 transaction, he or she was probably present during the appraisal and may have even provided a list of comparable closed sales to assist the appraiser. Your mortgage professional also most likely had a relationship with the appraiser. All of that has changed, though, as lending and appraisal standards have become more strict. Your mortgage professional probably has little idea who even performed the appraisal this go round. Any of these practices either in 2001, or with the changes now, could have affected the accuracy of your value.

2. Values simply plunged. Like I mentioned, with the rise of foreclosures this, unfortunately, may be the case. Go to your local property appraiser's website and check what your neighbors purchased their properties for recently. You will also be able to see who foreclosed. This will give you an idea of what your property is worth. Another easy way to get an estimate of your home's value is to look up your address on Zillow. (Warning: I only recommend Zillow as a quick pencil search, NOT an accurate portrayal of your home's value for the purpose of sale. Only a qualified local real estate professional can properly advise you on this.) Or, you can call a local Realtor who is very familiar with the area and ask for their professional opinion. Obviously, you'll want to refer these folks business, since nobody likes to work for free (but make sure you get advice from someone who does a lot of business in your neighborhood).

Enough about the why, let's move on and take a look at the position this puts you in today, and where you go from here. If you're considering (even the outside chance) that you may relocate in the next decade, than you might take this low appraisal as a blessing in disguise. At least it's a heads up that you may not be likely to recoup your upgrade costs anytime soon. However, if you plan on staying in your digs forever and ever, and absolutely want to move forward with your improvements, here are some of your options:

1. Have another appraisal done through a different lender. Since appraisal standards have changed, this may not be worth your time or money. Also, you can always ask to be refunded the cost of the original appraisal since you will not be moving forward with the loan.
2. Take out a personal loan or credit card debt. My opinion? Don't do it. You'll get killed with the interest rate, and it may affect your credit negatively. Even if it's a low interest credit card, or the like, be careful. 10 years ago, it might have been a better idea, but right now it's a lot of risk in a bad market.
3. Save your moolah and pay cash. Maybe play around on E-Trade or take out a CD until it's enough to cover the costs.
4. Do the work incrementally. You know, little by little. This can work out well, because over time opportunities for better deals on materials often present themselves. Also, at some point before you're finished, the market may bounce back.
5. Rob a bank. Always my favorite option, personally. But don't get caught.

I hope this helps give you an idea of why this may have happened, and where you can go from here. By the way, I literally stopped 3 or 4 times while writing this to throw a few of the boxes in Harry so if this didn't make complete sense or I forgot something, I apologize.

Oh! And thank you for the kind comments about my blog. I'm glad you enjoy it! I'll keep dropping in and checking the progress of your projects on House Of Allen!

Good luck with your refinance.


Steven Anthony said...

great info....

Sara @ Russet Street Reno said...

What a hard situation. I have several friends that want to cash-out refinance as well, and can't because their house is worth the same or less than what they owe. Most of these folks are either living with their current situation until prices come back up, or getting a loan from their families to do their renovations.

Alicia @ boylerpf said...

It is truly a shame what the economy...more the banking industry, Wall Street and our government...has done to the normal working person and the homes they have purchased! Good info...crossing my fingers that things do turn around.

Amy said...

Thanks for the post, Kelly! We are now considering reducing our cash out for our new construction and working with our contractor to do a lot of the work ourselves, at least the interior. We were truly in shock at the most recent appraisal; we lost 30% from the last appraisal! Glad I found Kelly's blog! I'll be needing it! : )

Kelly Muys Wood said...

Alicia, have you read my foreclosure post?

It's a novel, and it barely delves beyond the shell of this issue.

For everyone reading this blog, I have to comment that I think it's really, REALLY great that Amy brought up this question -- I couldn't believe the number of emails that I had sitting in my Inbox about it this morning. It seems like a lot of people are sort of hesitant to address the financial crisis in the blog world, in terms of how it relates to design and home improvement.

The fact that Amy is willing to have a dialogue about how they should consider financially approaching the work that they're doing to their property is responsible and smart. Here's hoping that more of us are openly willing to have these types of important conversations.

Thanks again for sharing, Amy!