Appraising and Financing High-Profile Properties
By Charlie Elliott, Jr., MAI, SRA

Having owned and operated an appraisal business for the past 25 years, I must say that when I began, I never imagined, in my wildest dreams, that individuals would routinely be buying properties and financing homes for amounts in excess of $1 million. Oh, and sometimes the number is in the millions, and many times it is a second or third home.

In our firm, my recollection is that the record for the most valuable property we have appraised is in the vicinity of $20 million. We are talking frequently about amenities, such as stables, tennis courts, putting greens, multiple car garages and security fences, before one gets to the inside of the house. These high-profile properties, in many cases, take a long time just to inspect and measure, and often require an even longer time for data collection. Finding true comparable sales is usually next to impossible and, naturally, the appraisal fee is always higher than the client expected.

Having said all of the above, I thought it appropriate to offer a few practical thoughts concerning appraising high-end properties for lenders, who may find the successful coordination of such deals between their underwriter and the appraiser to be a tall order.

• The qualification of the appraiser should be one of the first concerns. Lenders selecting appraisers to perform high-profile property appraisals should take care to select a professional with substantial experience in the area. Quite often big bucks are on the line for the lender, and when an underwriter senses that an appraisal is not professionally prepared, his confidence level in the deal may be diminished. After all, large loans carry with them risks not associated with your garden-variety home. Here we’re talking about something comparable to selecting a heart surgeon. Would you want to hire someone who has little experience in the field or someone who has successfully performed the operation on a daily basis for 10 years?
  
  Only state-certified appraisers are permitted to appraise properties involving transactions of $1 million or more. Those appraisers with state appraisal licenses are not technically qualified to handle the larger transactions. For good measure, a designated appraiser such as an ASA, SRA or MAI may add credibility to the process.
   

• Many underwriters require two independently prepared appraisals on million-dollar-plus properties. Frequently, a value reflecting an average of the two values will be adopted as the appraised value of the subject for purposes of the transaction. Expect the appraisals to vary.
   

• Expect the appraisal fees to be higher for high-end properties. Where appraisal fees for a typical house may be in the neighborhood of $300 to $350, it is not unusual for the high-end property appraisal to be $1,000 to $2,000, depending upon the location and complexity of the assignment. If two appraisals are required, double the size of this range, and soon you are paying between $2,000 and $4,000 in appraisal fees. Of course, this does not stop with the appraiser. Other professionals, including the lender, tend to charge higher fees on loans for such properties.
   

• Do not be surprised if the appraisal is less accurate on a high-end property, and that is not to say that the appraiser is not properly doing his or her job. This condition typically manifests itself when two appraisals are required. It is not unusual to see a variance in the two appraisals of 10% or more. One of the things that make variances seem larger is that the amount of dollars is so much larger. An example would be that the dollar variance between two appraisals on a typical property, where two appraisals average, say, $150,000, could be a spread of, say, $15,000. To the contrary, in cases where a $2 million property experiences similar treatment, the variance could be $200,000. Believe me it is much easier to explain a $15,000 variance to an underwriter than a $200,000 variance, even though the percentage of variance is the same. To add insult to injury, finding data for extremely high-end properties sometimes requires the use of distant comparables. Do not be surprised if they cross state lines, and even then do not expect the comparable sales to be truly comparable to the subject. If the comparables are 100 miles away and are off two or three bedrooms and/or a few acres of land, do not be alarmed. Some would say if that is all, one is lucky.
   

• Fannie Mae and Freddie Mac do not currently buy loans exceeding $359,650. Therefore, the secondary market for the jumbo or the Alternative A loan will be Wall Street or some other specialized investor. Typical underwriting guidelines are out the window, and each investor will have its own set of requirements. This will, in some cases, affect the type appraisal purchased and possibly the way the appraisal is constructed. Knowing the final destination of such loans and the underwriting requirements, prior to ordering the appraisal, can save time and money.
   

• On a relatively new home, one may want to be on guard to address the issues of construction cost, verses its market value. It is not unusual for a large, high-end home to have features built into it, which cost the seller more than a buyer may be willing to pay for. An example here may be sophisticated electronic equipment or an abundance of fancy millwork not accepted by the market. In appraisal jargon this is called “functional obsolescence.” There is no particular problem with it, other than that the appraised value may be less than the cost of the house, restricting the amount of the loan.
   

• There is much concern today about the possibility of a real estate bubble. Due to the additional risk associated with high-end properties and investor fears that any bubble that exists could suddenly collapse, I have found underwriters to be a bit pickier about the appraisals on these properties. More questions are asked about factors, such as days on the market or existing unsold inventory.

For those not already involved in the high-end market, there appears to be plenty of room to jump in. I hope that some of the issues addressed above, which I learned the hard way, will make sailing a bit smoother on your voyage.