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 significantly incorrect.

Many borrowers mistakenly use an online appraisal tool to support a value they believe their home should command. If they don’t agree with the appraiser, and to rebut a value, we need to present actual sales data for similar homes.

The cost per square foot to build is a common mistake many people make when arguing a value, because it is not 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?

Lastly, regarding the sales comparison approach, what would a knowledgeable buyer pay for a comparable property in that market? The cost approach is used primarily to determine what the property would cost to rebuild and doesn’t indicate whether a knowledgeable buyer would actually pay that price.

This doesn’t consider whether the property is an overimprovement for the area, whether it has outbuildings that are uncommon for the area, etc. It states that, if it were to burn down, this is what it would take to rebuild it 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 valuation method is used for commercial and multifamily properties, in which the property’s value is determined by the income it can generate.

It uses formulas to determine a property’s value over time based on the rents that can 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, also known as the use of comparable sales. This is where the appraiser must identify comparable sales to the property being appraised and adjust for size, condition, age, and other relevant factors to determine what buyers are paying for properties in that market area.

HUD Appraisal Guidelines

To be accurate, it relies on the appraiser being able to identify comparable sales. In addition to its other manuals, HUD has an appraisal manual, many hundreds of pages long, that lays out the requirements for acceptable appraisals and appraisal practices.

Appraisers can’t go too far away to obtain these closed sales; they must be recent, they can’t make adjustments that are too high relative to the actual sales, or the sale is not sufficiently comparable.

Using your example, if multiple sales of 5,000-square-foot properties with similar building materials and finishes are available, the appraiser can see what those properties sold for and determine that a knowledgeable buyer in your market is willing to pay for the 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 whether they cost $400,000 to build or $1,000,000; if they all sell for $700,000 in that market, that is the established “market value” for those homes.

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 will actually pay for the 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 comparable sales to support it, there is no way to know whether it is merely 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 they will not add 100% to the appraisal value if there are no comparable sales with similar amenities to support 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. However, you must realize that the perspective you are using here is not the same as that of the lender or HUD. 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.

Have Appraisal Questions? Get expert guidance from All Reverse Mortgage, Inc. (ARLO™) — America’s #1 Rated Lender with a 4.99/5-star rating! Call (800) 565-1722 or click here for your free quote — simple, trusted, 100% secure!

ARLO recommends these helpful resources:

• How Reverse Mortgage Appraisal Laws & Appeals Work