Appraising a property with no comps

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My wife and I live in a county with 2,500 full-time residents. We have a lot of cattle, sheep and trees. The county seat is a town of about 200.

Melissa is one of two lawyers in the county. This is one of our county’s major cools.

She recently bought a 90-year-old house to use as her office. It’s a simple two-story, two-over-two design with an enclosed back porch. She paid a little over $90,000 and put $50,000 into the conversion. Many of the renovations were specifically done to accommodate her clients and her law practice–extending the porch and making it handicap-accessible was about $10,000 alone. She moved the kitchen from one of the two large rooms downstairs back into one of the two small rooms in the enclosed porch. It’s a serviceable kitchen for an office, but too tight and unwieldy for a residence. The former kitchen/dining room area is now the legal secretary’s office. All of the wiring was replaced, made computer capable. All of the phone system was replaced to handle office lines and Internet service. Parking area, lighting, security measures, shelves, painting, floor refinishing, plumbing etc.–most of the money went for office-related purposes, not aesthetics. Had she bought it for a residence, no money would have been needed.

She wanted to refinance her loan to cover the improvements, much of which upped her basis in the property. She needed an new appraisal.

The appraiser, who had done the original appraisal when she borrowed for the purchase, came by again. His original valuation was about $115,000. He noted all the changes.

The new appraisal came back at $130,000, despite the more than $50,000 in documented expenditures, most of which were for office-conversion purposes. He said the highest and best use of this building was as a single-family residence. The conversion to an office had lowered its market value. The kitchen was too small and imposed a substantial discount. He noted the porch extension, but did not note that it was done to make the office handicap-accessible. The appraisal was not enough to cover the amount of refi wanted.

So what happened here? Our county is so small that he had no other house-to-office conversions with which to make a comparison. A couple of examples are available, but they were done several years back. They could not be used. The only set of comps the appraiser could find were residential houses, which were non-comps.

The appraiser was stuck with a method that didn’t fit the property he was asked to appraise. The bank was stuck with having to have a comp-based appraisal to document value for a refi. Melissa was stuck with a nonsensical valuation that didn’t fit her property.

Commonsense and flexibility are called for. Unfortunately, everyone is locked into a one-size-fits-all system that occasionally produces dumb results.

Over the years, I’ve run across a number of examples of properties in rural areas that while not unique in the sense that they are one-of-a-kind on a state or national basis, are either different from other properties in the county, or idiosyncratic or have some combination of assets and liabilities that make them difficult to compare to much of anything. A geodesic dome as a second home on 50 acres was the one dome that I knew of in four counties. Can that dome be fairly compared on a square-foot basis to the vernacular brick rancher? A lodge I knew had about 500 acres. It was located in a profoundly remote location, accessible by a somewhat tortuous 4WD trip that took at least an hour from the closest paved road. It was pretty much a stand-alone property. On an acreage basis, three comps could be found. On a truthful basis, none were available.

Several questions occurred to me from watching this play unfold.

How can lenders and appraisers make an exception for the odd-duck property that, in truth, has no local comps? Wouldn’t a sensible solution be to establish an exception-to-the-comp rule? How might the exception be protected from abuse? An exception would have to be crafted by the federal bank regulators: Fat chance, huh?

What should a borrower do in this situation? Was there anything Melissa could have done before the appraisal to protect her interest in getting a fair appraisal for her building as an office? Using residences as comps took us by surprise.

Once the bogus appraisal is on the lender’s desk, what can the borrower do? A second appraisal will run into the same methodological handcuffs as the first.

I’m sure others have had, or at least witnessed, this predicament. What are your thoughts?

About Author

Curtis Seltzer is a land consultant, columnist and author of How To Be a DIRT-SMART Buyer of Country Property, available at Curtis-Seltzer.com where his columns are posted. He also does commentary for Virginia public radio. His new book, Land Matters: The “Country Real Estate” Columns, 2007-2009, which includes 14 commentaries on CD.

10 Comments

  1. In our market, I deal with this issue a great deal. Instances have decreased in the past couple of years, but it is still a problem. Many of the areas that I work in have VERY low turnover rates. Appraisers routinely use properties seperated by 20-30 miles as comparables. I would argue that there are far to many variables to directly compare properties this far apart. Do I have a good solution to the problem? No. It is the best system we have at present. If the highest and best use of a property is some type of commodity production, then yeilds and site indexes can be used to effectively value a property. The problem with this arises when the highest and best use is commodity production coupled with some type of recreational use.

    In my opinion, the comparable sale approach is great for evaluating lots and houses in a subdivision. Variables between the properties can be kept to a minimum, measured, and valued. Typically there is enough turnover to provide time-relevant information to the appraiser. Once you step beyond the bounds of highly localized and homogenous markets like subdivisions, the comparable sale approach should be used with a hefty dose of common sense. Most lenders rely on the comparable sale approach, so I am hesitant to scrap the process, but my personal opinion is that comparable sale appraisals are of very limited value on rural land transactions and any other A-typical property.

  2. Mr. King:

    Thanks for your comment.

    Perhaps things would improve if appraisers were allowed to do two things at their discretion. First, give a range of values for a target property, rather than one number. Second, invoke the one-of-a-kind exception rule, which would allow them to give an opinion based on their best judgment and experience. Yrs. Curtis

  3. Mr. Seltzer,

    From my experience, I think many appriasers do use their best judgement as to value, and then work the comparables to support that. Most appraisers have a self-interest that cannot be seperated from thier product. If an appriaser comes in too low and kills many deals, they end up out of work. Nobody wants deals that have gotten to that point to not work out. Lenders make money off of making loans, they cannot make loans when appraisals are too low. So they seek out appraisers that tend to make their business better…from a self-interest standpoint.

    I know many different appraisers. The ones that stay the busiest conform to what lenders, customers, and agents want them too.

    I agree, a value range would be a better statement of value. When I have customers The problem I see with that though is that one side will gravitate to the high end and the other to the low end

  4. The last part of the above message must have gotten mangled in my word processor….

    Last paragraph

    I agree, a value range would be a better statement of value. When I give prices to consumers and potential clients, I always give a value range based on the best information that I have. From an appraisal standpoint, the problem I see with that, is one side will gravitate to the high end and the other to the low end.

  5. It seems that since Melissa bought the house and arranged it in a fashion to use as an office there probably was a lack of actual office space in town. And if that is the case Highest and best use for Melissa and anyone else in need of office space in that town would be converted office. So the issue becomes not the comps in the area but what the property is worth based on income. What are other local rents going for? Figure out what Melissa would be willing to pay for a comparable structure for rent based on square feet.

    Prior to another appraisal, she could start another company and rent the office back to herself. That would further prove that this is an income property and add a little separation from her and her actual business. And because the office has been fixed up so nice she may be willing to pay more for rent which in turn will make the structure worth more on an appraisal. The income approach really ignores all of the stuff she has done to the property and looks at what price can be paid to yield a particular return for the buyer.

    If Melissa is willing to pay say $1200 per month which is $14,400 per year, at a cap rate of 10 percent you would get a value of $144,000. This is just simple figuring and ignoring taxes and insurance but you get the drift. Forget about looking at other residential properties this is about dollars and cents. This building is being held for the purpose of creating income and why the original appraiser didn’t look at the income approach is beyond me. They are supposed to look at all three approaches to value, comparable sales , cost, and income.

  6. A year later: July 2009

    APPRAISALS with no or obviously low comps are now everywhere. Logically, you are right. Banks are here to make money on loans and appraisers should be helping. The tables have turned worse, however. In 2009 the appraisers are coming from miles and miles away from the subject property, which means they have very little information about the area to be appraised. They are pulling “comps” for a 1000 sq ft condo that are only 450 to 750 sq ft because the banks are demanding that the appraiser come in as LOW as possible. The recession is never going to end until the banks take a stance of trying to help the consumer out of this mess. I’ve lost 5 offers because my condo doesn’t meet the appraisals here in California. This is ridiculous!!!!

  7. You’re right. It is ridiculous when appraisers are pulling comps that aren’t comps. The pendulum has swung back too far.

    Here’s what I suggest…and have done in the past.
    I would write a generic value-analysis-of-my-propeprty letter that you can give to agents, appraisers and banks. I would do my own research into comps, making generalized adjustments for differences. Don’t try to be an appraiser, just try to approach your condo neutrally and fairly. I would point out why earlier appraisers were too low, and why your condo has (or may have) certain features that appraisers did not fully consider, or considered incorrectly.
    You might even want to hire your own appraisal, which you append to this letter.

    I would look for financing from a credit union before a bank, or through a broker.

    Yrs. Curtis

  8. Hi: We are facing the same problem melissa had. We found a wonderful lot of 2.67 acres just 200 meters from the beach in Puerto Rico. Located in a touristic area, one block away form a hotel and a beach houses area. Great up-scale zone. To be sure the asking price was correct, we pay for an appraisal and came out $3,000 less… then we thought we were ok and continued to make an offer subject to obtain the construction permits and bank loan… the blueprints were ready so we went to the bank… They order an appraisal based in the projected price with the house built… for our surprise the projected price lowered the lot price for over $100,000.00 !!!!. So they wanted us to pay on cash for that difference… The design of the house is somehow unique, modern Bali style with all 3 modules with ocean view and wooden decks..so spectacular!… The bank said there were con comparable, no matter that the house was so beautiful. They do not offer us the loan we need despite my husband outstanding credit and solvency… was a matter of not finding comparables in the last 6 months few miles away. So because the market is frozen… the banks promote keep it at glacier stage!!!! No wonder there is a Market Crisis!!!

  9. Curtis Seltzer on

    Isabel–Try this.

    Get every fact you can about the house, the local market, the appraisal you have (the appraiser’s experience, etc.) and make an appointment with the bank president. Take a local lawyer with you who does work with the bank. Pitch yourself and the property as a package. Banks will have a portfolio of properties that they hold in their hands, not resell in the mortgage market. That’s your target destination. Best of luck. Curtis

  10. Douglas Cassan on

    As a (Canadian) realtor of 35 years’ experience, I constantly wrestle with property evaluations involving questionable comparables. A current situation illustrates the problem: I have a listing valued at $194,900 in one of our most requested areas; we heavily discounted the price because the home is on a busy corner. No matter, everyone walks in and complains about the road noise; they won’t buy it at any price. This is the very best value in the area, but buyers willingly pay $50,000 more for a similar house on a quieter street because money is so cheap to borrow. Ultimately, appraisals and realtors’ opinions aside, the market always decides.

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