A pretty large appraisal discrepancy

Apologies for the lack of posts these last couple of days.

Today, I got word that an appraisal hit at the contract on price ($850,000) on a deal one of our agents is working on.

That wouldn’t be such a big deal, except that another appraiser for a different bank recently appraised the exact same property at $700,000.

That’s a ~18% difference in value… not some kind of rounding error.

What’s going on here?

Well, these kind of appraisal discrepancies tend to occur with properties with some of all of the following characteristics:

  1. Located in an emerging neighborhood – When a neighborhood starts to change, it’s very difficult to comp out rents. You will find gentrifying tenants renting renovated units for 30-50% more than “market” rate units on the same street.
  2. Rent controlled comps – Appraisers naturally look to the MLS to comp rents. However, they are often unaware of rent control, leading them to base their estimates of “market” on controlled, sub-market rents.
  3. Property type which is rare for the neighborhood – If you are buying, say, a 4plex on in an area dominated by single family homes, the appraiser is going to have trouble finding relevant comparable transaction. (Ironically, you’re probably making a good deal, especially if the area has been down-zoned so that no one else can build 4plexes)

Unfortunately for the first buyer, the first appraiser fell victim to all of the above. Fortunately for second buyer, the second appraiser did not.