Here is where Appraisals are not updated and correct. Zillow and others use sales per sq ft for cookie-cutter homes. They omit custom built homes in comparable homes because of lack of construction knowledge and insurance coverage? Costs of replacement coverage and appraisals would place a 5000 sq ft total home cost at $800,000-min w/o lot? Go Figure how you could be insulted at $600k on a no-nothing Appraisal.

You just hit the nail squarely on the head, but from an angle you didn’t mean to go.  Appraisers don’t use Zillow or other online evaluation technology for just this reason.  Most online estimates can only give you an average of data in an area, and unless there are a lot of sales of the same type of homes, their estimates can be sharply incorrect.

Many borrowers often mistakenly use an online engine of some sort to try to support a value they believe their appraisal should indicate for their home if they don’t agree with the appraiser and to be able to rebut a value, we need to show actual sales data of similar homes.

The cost per square foot to build is a common mistake that many people make when trying to argue a value due to the fact that this is not even a factor in most cases when evaluating a residential property.  Let me explain…

Sales Comparison Method

There are three approaches to value as established by the Universal Standards of Professional Appraisal Practice (USPAP).  Each has its place when appraising properties.  There is the cost method: what does it cost to rebuild the home?  The income approach: how much income will the property generate?

And lastly, regarding the sales comparison approach, what will a knowledgeable buyer pay for a similar property in that market?  The cost approach is used more to determine what the property would cost to rebuild and doesn’t indicate whether or not a knowledgeable buyer would actually pay that price.

This doesn’t consider whether the property is an over-improvement for the area if it has outbuildings that are not common for the area, etc.  It just says that if it were to burn down, this is what it would take to build it again as it currently stands.

HUD does not intend to insure a loan on a property that is an over-improvement for the area or has unique features that if the borrower defaults and ends up owning the property, they can only sell for a fraction of the cost it took to build if that’s what they used for lending purposes so they do not allow appraisers to use this method when appraising for FHA-insured loans.

The second approach mentioned is the income approach.  This is a method of valuation used for commercial and multi-family properties whereby the value of the property is determined by the income it can generate.

It uses formulas to determine a property’s value over a period of time based on the rents that could reasonably be expected to be collected. Again, it has no use for a single-family, owner-occupied residential home.

Therefore, it is not a measure used by appraisers for HUD/FHA-insured loans.

This leaves us with the sales comparison approach or the use of comparable sales. 

This is where the appraiser has to find sales that are similar to the home he/she is appraising and make adjustments for size, condition, age, etc., to determine what buyers are paying for properties in that market area.

HUD Appraisal Guidelines

To be accurate, it relies on the appraiser actually being able to find similar sales.  In addition to all their other manuals, HUD has an appraisal manual many hundreds of pages long laying out the requirements for an acceptable appraisal and practices.

Appraisers can’t go too far away to get these closed sales, they must be recent, they can’t make adjustments that are too high from the actual sales or the sale is not really all that comparable.

Using your example, if there are multiple sales of 5,000 square foot properties with similar building materials and finishes, the appraiser can see what those properties sold for and can determine a knowledgeable buyer in your market is willing to pay for that property.  If all the houses around you, though, are the 2,500 square foot “cookie cutter” homes you reference, you could have a problem.

If there are similar 5,000 square foot homes, it doesn’t matter if it only cost $400,000 to build them or if it costs $1,000,000 to build, if they all sell for $700,000 for those similar properties, that is the established “market value” for those homes in that market.

On the other hand, if there are no sales of similar homes and the appraiser tries to take a home that is much smaller and had inferior building materials that sold for $500,000 and adjust the value to $800,000 because the properties are so dissimilar with no sales to support his adjustments (60% adjustments), the appraisal would not be accepted by HUD.

With no sales to support the adjustments, who is to say what a knowledgeable buyer in that market really will pay for that property? And that’s also why three sales are required, not just one.  One sale may be an anomaly and not necessarily support a market consensus.

It may be your contention that your home is worth that much, but unless you have other sales to support that, there is no way to know that it is not just an over-improvement for the area.

That is not to say that it’s wrong for homeowners to build the home they want to build or that just because there are no sales, it isn’t worth that much or that they could not sell it for that price.  Many people over-improve their homes in one way or another.

Adjustments & Rebuttals

Some add too much square footage, and their home becomes the biggest in the neighborhood.  Some add buildings such as guest houses, barns, or sheds that no one else in the area has.

These additions may work very well for the homeowner, but they may not bring dollar for dollar back when the home is sold, and it definitely will not bring 100% value to the appraisal if there are no sales with similar amenities to support the marketability and value.

You may have someone come along and see your home and offer more than the $800,000 it took to build, but without the sales to support it, reverse mortgage lenders and HUD are not willing to take that risk.

You can dispute an appraisal if you believe the appraiser missed available information or made a mistake.  But you must realize that the perspective you are using here is not the same one the lender or HUD will use.  Just because you put the money into the house, that doesn’t mean the house is that much more valuable.

If there are sales similar to your home that the appraiser missed and used the wrong sales of tract housing, you can rebut their opinion of value by supplying the sales of similar homes and showing the sale prices at which they sold.

If your argument is just that you disagree with the estimate of value because of the cost per square foot to build it, you have already lost the argument.

ARLO recommends these helpful resources: 

• How Reverse Mortgage Appraisal Laws & Appeals Work