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The 7 Most Common Issues and Errors with Real Estate Appraisals

The Art of Deciphering Appraisal Reports

I conduct appraisal review assignments for attorneys, accountants, banks, lenders, appraisal management companies and other clients as part of my appraisal practice.

There are two types of real estate appraisal reports which I review; FNMA or lender reports and market value or non-lender reports.  For this article I will focus on the 7 most common issues and errors with market value appraisals.  All errors are violation of the requirements set forth in an ever-changing  set of quality control standards called the Uniform Standards of Professional Appraisal Practice (USPAP) to which all appraisers are bound.

The 7 Most Common Issues and Errors with Market Value Real Estate Appraisals

  1. Using the wrong appraisal form
  2. Missing highest and best use analysis
  3. Excluding an approach to value with no explanation
  4. No reconciliation between various value approaches
  5. Lacking time adjustments
  6. Incorrect date of value
  7. Factual errors

 

Using the wrong appraisal form

Sometimes I see forms that were designed by FNMA for use with federally insured loans being used for divorce, probate, pre-listing, tax or other non-lending appraisals.  So how does this cause a problem? These lending forms have pre-printed scopes of work, certifications and intended uses and intended users that are not appropriate for non-lender assignments. 

 

Missing highest and best use analysis

Highest and best use is always that use which would produce the highest value for a property, regardless of its actual current use. It is necessary for the appraiser to develop an opinion of the properties highest and best use and then to report a summary of the analysis within the appraisal report.

No reconciliation between various value approaches

There are three approaches to value;  the cost approach, the income approach and the sales comparison approach.  When an appraiser uses more than one approach usually they won’t lead to exactly the same value.  So how does an appraiser arrive at one final opinion of value?  the process is called the reconciliation between value approaches.

 

Excluding an approach to value with no explanation

An appraiser does not have to develop all three of the approaches to value as long as the resulting conclusion is not compromised and can be relied upon for its intended use. However, the appraiser is required to explain why any of the three approaches  was excluded.

 

Lacking time adjustments

When the real estate market has increased (or decreased) since the time a comparable was sold a date of sale adjustment will help to bring the old comp up to date with the current market.  The lack of an adjustment in this case is likely to affect the final valuation.

 

Incorrect date of value

Each appraisal has an effective date of value. It can be current, retroactive (past) or prospective (future).  I primarily see this error with tax abatement appraisals.  When homes are assessed for 2014 taxes the values were based on the fair market value of the home as of January 1st 2013.  In that case the appraiser must complete a retrospective appraisal using only sales that closed before January 1st 2013, the effective date of value.

 

Factual Errors

Most appraisals tend to rely on the sales comparison approach to value. This means that fact checking comparable sales is perhaps the most important parts of the appraisal process.  The MLS data is entered by individual brokers and not policed by MLS or anybody else.  As a result it is full of errors.  As the saying  goes “garbage in, garbage out” meaning that  the use of inaccurate data will lead an appraiser to arrive at an inaccurate valuation.

 

If you have any questions or think your firm would benefit from a presentation on any appraisal issues please feel free to contact me.  If you found this article helpful or informative, I would be grateful if you would like and share it with others.

And please let me know if there is any real estate or appraisal related topics that you are interested in.

Adam Wiener, CRA

Adam Wiener

Adam@AladdinAppraisal.com

 

Tags: real estate appraiser, real estate appraisal, appraisal errors, appraisal issues

 

 

HOMESTEAD- Protect your Home

Friends of mine recently refinanced their house and the attorney pointed out that there was a change in Mass law to protect homeowners.  It raised the amount that you can protect significantly, but you must file with the county to get the protection.  The link below explains the law.

http://www.massresources.org/homestead-act.html

Under the amended Homestead Act, up to $125,000 of a homeowner’s equity is automatically protected by law.  A homeowner can protect up to $500,000 in equity by filing a Declaration of Homestead with the Registry of Deeds.

 

If you found this article helpful or informative, I would be grateful if you would like and share it with others. And please let me know if there is any real estate or appraisal related topics that you are interested in. – Adam@AladdinAppraisal.com

Prices per Square Foot, the Truth for Home Buyers

compare home valuesA real estate appraiser’s perspective:  Buying a house based on the price per square foot is like paying for a car based on its miles per gallon; and yet to this day I see buyers, sellers, mortgage and real estate professionals discussing and using square foot price as a method for comparing homes to try and determine value.

 

A 2,000 square foot home that sold for $400,000 did technically sell for$200/sf so the appeal is understandable because on the surface price per square foot takes a very complex problem and appears to deliver a simple solution but it is an illusion. Tempting as it is using $200/sf as the basis to determine the value of any other home is fatally flawed because it is what lies below the surface that counts.

 

Here is why price per square foot is misleading as an indicator of a home’s value. My real estate data comes from Boston and its suburbs but wherever you are there are certain universal truths about American real estate values.   How much a home is worth ultimately depends on the following list of key characteristics that influence market value of a home.

  1. Location
  2. Lot sizeHome Value Checklist
  3. View
  4. Style
  5. Age
  6. Condition
  7. Quality
  8. Size (square feet)
  9. Floor plan (#Room/#Bed/#Bath)
  10. Parking
  11. Other amenities
  12. Time – When the home sold

 

You can tweak or argue the completeness of the list but it is the differences in all of the various characteristics which influence the sales price and ultimately the price per square foot.  Ask yourself this; would someone pay more for a home on a quiet tree-lined cul-de-sac than they would pay for the same exact home along a very busy main street?  And since the sale included the lot upon which the house was built, how much of that $200/sf do you think was for the land?

 

Let us peel back a few layers of the real value problem. Here is a recent real life example of two similar homes that sold recently in Framingham, MA presented in matched pair format where you can see the same sized house sold for two very different prices per square foot, and it is not difficult to understand why.

Address 70 Hemenway Rd 76 Hemenway Rd
location Not a factor Not a factor
lot Size 0.56 acres 0.59 acres
view Not a factor Not a factor
style Slab Ranch Slab Ranch
age 56 years 56 years
condition significant updates 2009-2010 carpet/paint toilet oven cheap cabinets
quality upgraded K&B  quality inferior/original
square footage 1,440 1,454
Floor Plan 8Rm-3Bd-1.5Ba 7Rm-3Bd-1.5Ba (assessor says 1 bath)
Heat/AC FHW-propane/ CAC FHW-Oil/Wall AC
Parking Driveway Driveway
Other amenities Fireplace/Radiant bath/Patio Fireplace
contract date 11/22/2013 11/12/2013
closing date 12/5/2013 12/17/2013
Sale Price $348,000 $233,000
Price per sf $242 $160
2013 Assessment $282,200 $273,200

 

Why the huge difference in the price paid per square foot? These two homes have almost the exact same location, size and bed/ bath utility but there is a difference of $115,000 attributable to the superior condition and quality of the first house.  The other home needed of some repairs and the little bit of updating was of low quality.

 

I describe appraisers as trained professionals who pretend to buy houses for a living.  There is a skill set which comes from training and experience and there are practices and methodology that are brought to bear on solving the problem of; what is this hose worth?  in the end appraisers mirror the behavior of buyers in the market, and everyone; sellers, buyers, realtors and appraisers are all trying to solve the same problem. What is this house worth today?

How often do you buy or sell a home? Do not be penny wise and pound foolish.  If you are buying or selling you need a realtor to navigate through the negotiation and other complexities then hire a knowledgeable independent appraiser to develop their unbiased independent opinion of value.

 

Resource Box: Adam Wiener is a certified residential real estate appraiser in the Greater Boston area.  To see more about on expert methods, tips, and knowledge about residential real estate please visit http://www.aladdinappraisal.com  the sales information is publicly available www.zillow.com  or www.trulia.com . Framingham assessor’s database is found at http://www.framinghamma.gov/index.aspx?NID=658

PMI Removal Appraisals

Private Mortgage InsuranceHave you given any thought to exactly what makes up your monthly mortgage payment?  If you purchased your home with less than 20% down payment, you are paying private mortgage insurance (PMI).

PMI is an insurance you agreed to pay to compensate for the higher risk the lender took on your purchase.  With favorable market conditions in our area many home values have increased.  the question to ask is; is my mortgage balance now lower than 80% of my homes fair market value?  If so, you should remove the PMI immediately and lower your monthly payments putting that money back into your pocket.

There is legislation requiring lenders to communicate about PMI but it is not advisable for you to wait for the lender to get around to contacting you.  if you’ve reached 20% equity in your home by either appreciation, home improvements or paying down the principal mortgage balance (or any combination of the three) you can force the lender to cancel your PMI.  most lenders have a brief form to fill out, and you must provide proof positive of sufficient equity over 20%.

Lenders will not accept your tax assessor’s value, a Brokers Price Opinion (BPO) or a Zestimate.  the assessed value has absolutely no supportable correlation whatsoever with the fair market value. A tax assessment is not the same as an appraisal because the intended use of the assessed value is primarily reserved for property taxation purposes. Actual sales used in the assessment process lag at least six months behind.  BPOs are not considered accurate enough for federally secured mortgages (FNMA).  Zillow publishes its own comparison of actual sales prices vs. their Zestimates which reveals an alarming rate of inaccuracy.

The positive financial impact when you halt PMI payments is similar to plugging a leak in the bottom of a bowl; your money now begins to accumulate. This simple move can give you access to a pool of funds  which can be a financial game changer for your family as you can pay down other debt, invest in retirement, start a college or a vacation fund, etc.

You need to hire the services of a professional real estate appraiser to estimate the fair market value of your properties. The appraisal should be in the form of a well-supported, professional, appraisal report. State and Federal laws require that the Appraiser and the appraisal process be independent from any influence, coercion or undue pressure. Appraisers cannot accept an appraisal assignment based on a predetermined value. This allows the Appraiser to remain an independent, third-party.

Our approach: We understand the potential positive impact to you when you remove PMI.  we offer a free initial consultation and in some cases it may be fairly obvious if an appraisal is appropriate or not.  It is typically not possible to determine in advance if you have sufficient equity in your home to enable you to cancel your PMI.

Appraisers are prohibited by the Uniform Standards of Professional Appraisal Practice (USPAP) from accepting an appraisal assignment subject to hitting a desired value. We are also bound by the ethical provisions within USPAP which guarantees our customers the highest level of confidentiality and discretion. In addition, we provide you with comprehensive appraisal reports that meet or exceed requirements of lenders, the IRS, courts and other various agencies.

Working with Aladdin Appraisal rest assured that you will get the best in professional service and courtesy, while also receiving the highest quality appraisal reports. While we cannot guarantee a value that would “work” for PMI removal  our team of exceptional appraisers will take no shortcuts in the research and comparable verification stages which can lead to comparables and other data that is expected when you hire a top quality appraiser.

Our Senior Staff Appraiser, Adam Wiener, CRA will complete or personally review your appraisal. Our extensive experience includes dealing with local and prestigious law firms in the Greater Boston area. We welcome and invite your questions about our process.

Call  617-517-3711

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Tags: property tax, Real estate appraiser, real estate appraisal

How to Win a Property Tax Appeal

how to succesfully lower property taxIf you are a Massachusetts property owner and believe you are paying more than your fair share of property taxes you only have a limited amount of time to appeal, depending on your city or town.  Typically the appeal deadline is prior to the date of the first annual payment, although you still have to make the first payment even if you are disputing the amount.

There are only three actions available to you.

  1. Discuss your assessment request with your local assessor.
  2. Apply for a tax abatement at your local assessor’s office.
  3. Once denied, appeal to the appellate tax board.

Assessors will not accept a Broker’s Price Opinion or a Zestimate.  This is due to the fact that BPOs are not considered accurate enough for federally secured mortgages (FNMA) and Zillow publishes its own comparison of actual sales prices vs. their Zestimates which reveals an alarming rate of inaccuracy.

Most successful appeals require an appraisal done by a licensed real estate appraiser, who will provide an expert opinion of the fair market value. (MA law provides that the fair market value of property is the price on which a willing seller would sell the property to a willing buyer in an arm’s-length sale if neither party was under compulsion and each was aware of all relevant facts.  See Boston Gas Co. v. Assessors of Boston, 334 Mass. 549 (1956).)

State and Federal laws require that the appraiser and the appraisal process must be independent from any influence, coercion or pressure. This ensures that the appraiser remains a truly independent third party.  The appraisal should include a well-supported, professional report that is defensible in court.  Therefore selecting a qualified appraiser who, if needed, can also give clear testimony can be extremely important.

Did you know that in an assessment the properties must be valued as of the January 1st that preceded the fiscal year at issue?  For example, for fiscal year 2014, which runs from July 1, 2013 to June 30, 2014, the valuation date is January 1, 2013. Therefore, it is critically important that you hire an appraiser experienced in Retrospective appraisals. That is because the effective date of value of your appraisal must match the effective date used at the time of your assessment.   It is not uncommon for an appraiser to use the “current date”.  The dates must match or the appraisal you paid for will not be usable.

Our approach:  When you hire us for an assessment appeal, you’re commissioning us as an independent, third-party to perform a professional appraisal report. As such, we do our own evaluation from beginning to end. If you’re correct that your property has been overvalued our independent report will be more persuasive than any other evidence you can provide on your own. But once again it does depend on our ability to do the work independently.

Appraisers are prohibited by the Uniform Standards of Professional Appraisal Practice (USPAP) from accepting an appraisal assignment  subject to hitting a desired value. Nor are we allowed to take any research or other shortcuts.  We are also bound by the ethical provisions within USPAP which guarantees our customers the highest level of confidentiality and discretion. In addition, we provide you with comprehensive appraisal reports that meet or exceed requirements of the IRS, courts and other various agencies.

Working with Aladdin Appraisal rest assured that you will get the best in professional service and courtesy, while also receiving the highest quality appraisal reports. Our team of exceptional appraisers will be discreet and respect and protect your family’s privacy.   And if necessary Aladdin Appraisal stands behinds its appraisals and value estimates should matters advance to the need for testimony.

Adam Wiener Aladdin AppraisalsOur Senior Staff Appraiser, Adam Wiener, CRA will complete or personally review your appraisal. Our extensive experience includes dealing with local and prestigious law firms in the Greater Boston area. We welcome your telephone inquiries and invite your questions about our process.

Tags:  property tax, how to win a property tax appeal, real estate tax appeal,

If you found this article helpful or informative, I would be grateful if you would like and share it with others. And please let me know if there is any real estate or appraisal related topics that you are interested in. – Adam@AladdinAppraisal.com

What is the Actual Square Footage of My House?

House confused

Would you believe most people don’t really know how many square feet of living area are in the home they own, are about to list, buy or sell.  Our experience with Greater Boston real estate appraisals continues to prove this truth.

ANSI Z-765 (the American National Standard Institute publication) is the go-to method for calculating square footage for single family residential buildings; however, there is no requirement that real estate agents, architects, assessors, insurance companies and appraisers use the same specific standard method for calculating the living area of a home.  This lack of a single standard creates several problems for everyone.

 ANSI Z-765 is a fair standard used by most professionals in real estate for Gross Living Area (GLA).  There are many steps to follow found in the 16 page PDF, but I have it boiled down to 4 key ides for this blog.

  1. Use exterior dimensions rounded to the nearest foot for each floor
  2. Include only areas above grade, no finished basements
  3. Openings: stairwells yes, but subtract certain stairwell and openings to below
  4. Minimum ceiling height 7’  In sloped rooms; exclude areas with less than 5’

So what is the answer to “What is the Actual Square Footage of a House?”  In actual practice, depends on who you are and what your interest are in the GLA.

  • Home Owners – Are interested in getting what they paid for and not paying unfair taxes.   I suggest you check the assessor record for your home, specifically the lot size, living area and amenities such as bathroom count, garage etc. You may be surprised at what you are being taxed on.
  • Selling Agents and FSBOs –Are interested in maximum sale price. I suggest you have verified the true GLA before you list.
  • Recent Home Buyers Too late. I  recommend that you check your appraisal sketch and GLA (you got a copy at closing). Then compare it to the original MLS advertisement and the assessor’s GLA.  Be sure you are not over or under insured since your insurance is typically based in part on the assessor’s square footage.
  • Architects and Builders– Most are on the ANSI Z765 standard. To the rest I say, please stop “accidentally” mixing up gross building area and gross LIVING area.  Just stop.
  • Assessors– Have one job.  They must hit a financial target by sharing the total tax burden across the universe of real estate in their city or town.
  • Appraisers– Don’t have to, but most use the ANSI Z765 standard. To my fellow appraisers if you don’t own and use the ANSI Z765 standard, I recommend that you buy it.

Here are some more thought on the subject.

  • Homeowners: One of the many reasons you will never be able to estimate your house value free online is that all too often the living area and other crucial data reported on public records differs from what actually exists.  Therefor all online services are using bad data.
  • Real Estate Agents & Sellers:  List a home smaller than actual and you have just left money on the table; we see it more than you would believe especially in Greater Boston.  Listing homes larger than actual (aka broker puffery) and potential buyers leave with bad feelings about you.
  • FSBOs: For Sale by Owner? See paragraph directly above.
  • Buyers: You are totally unprotected and at the mercy of the ethics of the listing broker or limits of their knowledge.
  • Architects & Builders: Typically use ANSI Z765, although we regularly catch inaccuracies with new construction for varied reasons, primarily due to plans that changed or using the Gross Building Area (GBA).  We recently lowered taxes for new home buyers in Newton and Cambridge by alerting the assessor to correct inaccurate brand new records.
  • Assessors: the world of mass appraisals comes with mass measurements and mass errors. Inaccuracies are inherent in Capes and Colonials due to use of percentages for upper stories vs. actual measurements, exclusion of an upper finished story, inaccurate subcontracted mass appraisal measuring services, field sketch mix-ups, measurements estimated due to inaccessible exteriors, and exclusion of above-grade GLA in lower levels
  • Appraisers:  FNMA appraisal requirements  for what “is” living area are 100% clear.  They require use of the Above Grade Gross Living Area (GLA) only, period.  Yes finished basement have value but they ARE NOT part of the GLA.   FNMA does not require use of ANSI Z765 but the best appraisal practice is to do so because it is a good and fair standard.
  • Finished basements: Which would you pay more for; a walk-out basement with a floor that is level with your backyard, full size doors and windows, glass sliders, abundant natural light and ventilation, or a dark walk-up basement with tiny windows?  the value per square foot of a basement varies WIDELY due to type of construction. This is why it is not part of GLA and absolutely must be broken out,  as is the case in the updated FNMA forms which now distinguish between walk-out, walk-up and interior only(finally).

Tags: FSBO, List my House, house value, Real Estate Value, Newton real estate appraiser, Newton real estate appraisal, Newton appraiser, Newton appraisal, Boston appraisal, Boston appraiser, MA appraiser

If you found this article helpful or informative, I would be grateful if you would like and share it with others. And please let me know if there is any real estate or appraisal related topics that you are interested in. – Adam@AladdinAppraisal.com

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