Our Judgements Are Based On What We Observe

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There is an old house on a main street near where I live. It has been used as a commercial property for years. A few years ago, a roofing company purchased the home and use it as their commercial office for their company. Multiple times a week, I drive past this property. I took the picture of their garage above a couple of weeks ago. Notice the roof? It irritates me every time I drive by this property.  I wonder if this might be a reflection of their work, since they are a roofing company and have not repaired their own roof after several years of owning the property.

To be fair, they may be good roofers. However, I would probably not use them for the reasons I mentioned. We all make judgements based upon what we observe. How does that relate to appraisals?

Sometimes what we see is not always reflective of the whole situation. For instance, I recently performed an appraisal of a century home for a bankruptcy. Driving up to the home, I immediately observed that the exterior was in rough shape, with a lot of repairs needed. It kind of looked like the Munster’s home. (If you’re too young to know who that is, see the video below) My first thought was, ‘oh boy, the inside is probably going to be in the same shape’.

Well, I was pleasantly surprised that the interior was in surprisingly good condition. This goes to show that it is difficult to make an accurate judgement based upon a limited observation. The more limited the observation, the greater the chance that our judgement may not reflect reality. That being said, typically if a home is in poor condition on the exterior, it is usually the same on the interior and visa versa. So more often than not, our judgements are supportable. But, as illustrated, that’s not always the case.

READILY OBSERVABLE

Appraisers make judgements based upon what is readily observable. What does that mean? The term readily is defined in some dictionaries, including dictionary.com as “promptly, quickly or easily”.

With regards to inspections, many appraisers prefer the term observation because saying we are making an “inspection” may not imply observing things promptly, quickly or easily. Have you ever thought to yourself, ‘man, all that appraiser did was just take one quick look in each room and now they are making a value judgement in my home! What a racket!’

Remember that an appraisal observation is not nearly as extensive as a home inspection and should not be confused as such. After the observation, an appraiser will spend hours analyzing market data to establish an estimated market value. So, the observation of the home is a relatively small part of the overall process. On the other hand, a home inspector will spend four or five hours inspecting a home, but the time they spend writing their reports is considerably less.

It should be noted that the time it takes to make the observation is commensurate with the type of property being appraised. For instance, when I am appraising a large luxury home, the observation might take hours whereas a tiny home might 25 minutes.

 

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Notice what the Advisory Opinion (AO-2) in the 2018-2019 USPAP says about the observation process for an appraisal:

“Every assignment is subject to conditions that limit, in one way or another, the inspection of the subject property. Regardless of the detail one employs, it is always possible to perform an inspection that is more thorough. The appraiser’s inspection commonly is limited to those things readily observable without the use of special testing or equipment.”

It goes on to say, “There are many circumstances that influence the extent of the appraiser’s property inspection. In some assignments, the client may request that the appraiser perform an exterior-only inspection from the street or perform no inspection of the subject property (i.e., a “desktop appraisal”). There are situations where inspection of the subject property is not possible; for example, if the improvements have been destroyed, removed, or not yet built. In other cases the appraiser is denied access to the property… The appraiser must ensure that the degree of inspection is adequate to develop a credible appraisal. An appraiser cannot develop a credible appraisal if adequate information about the relevant characteristics of the subject property is not available…An inspection conducted by an appraiser is usually not the equivalent of an inspection by an inspection professional. An appraiser’s observations must, at the minimum, be thorough enough to properly develop the appraisal and adequately report the relevant characteristics. Regardless of how the information is gathered, it must be sufficient for the development of relevant analysis, such as highest and best use, the application of the approaches, etc.”

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WHAT APPRAISERS LOOK FOR

When walking through a home, an appraiser is looking at things that have an impact on market value and marketability. Things like the materials used, condition, flooring, mill work (trim), lighting, fenestration, upgrades, updates, functional issues and so on. Often times, this can be done fairly quickly.

When it comes to condition, we make judgements based upon what we can readily observe. For instance, when we view a room, if there are no signs of water intrusion like staining on the ceiling or walls, or some other indication of a roof leak, we are naturally going to assume that the roof is doing its job properly. (For FHA inspections we will look in the attic) When we observe the mechanical systems, if they appear to be in tact, with nothing that appears to be out of the ordinary or any dangerous situations, we are going to assume that the mechanical systems are operating acceptably. When we observe the walls, ceilings, flooring and foundation walls, if there are no signs of major settlement like cracks in the walls and ceilings or bulging floors (or other issues), we are going to assume that there are no structural issues. If the basement appears to be dry in the areas we can observe, we are going to assume that there are no water intrusion issues in the basement.  You get the point. More may be going on behind the scenes. However, if it’s not readily observable, an appraiser may not catch it.

 

 

However, there are times when the appraisal observation may take a considerably longer time. For instance, when appraising a luxury home with very high quality materials, upgrades and other amenities that could impact value. Some homes offer unique attributes that take longer to observe and document. If the appraiser’s observation seems to go rather quickly, it does not mean that they were not paying attention or that they were acting carelessly. Appraisers have a systematic way of performing observations, which may seem too quick to some who really doesn’t understand what we are looking for. Of course, an appraiser needs to take care in making sure that an accurate observation is made no matter what the speed, as indicated by the comments in USPAP. The time it takes to make the inspection is commensurate with the type of property being appraised.

 

Luxury Home

Tiny House

COMPARABLE SALE JUDGMENT

When looking for comparable sales, in addition to exterior views from the street, I rely heavily on MLS notes and interior photos. Interior photos are very helpful. Sometimes, the MLS notes state that the interior has been totally renovated. However, the interior photos may reflect a different situation.

Speaking of MLS interior photos, there is a community in my area in which some real estate agents are removing interior MLS photos on nearly all of their listings after the properties have sold. While there is nothing wrong with that, I think it may make it more difficult for appraisers to make accurate judgements on that property’s condition, which could lead to less accurate valuations. We judge on what we observe. The less we can observe, the less accurate or judgements may be.

FULL VS EXTERIOR APPRAISAL

Fore the reasons mentioned above, it’s clear that a full appraisal with an interior observation is likely to yield a more accurate value opinion. Something to keep in mind when ordering an appraisal. If you qualify for a Property Inspection Waiver (PIW), remember that any valuation indicator that you are using, if any, will be less accurate than having a full appraisal completed by a licensed or certified appraiser, with a full interior and exterior observation being made. If the bank is using a hybrid style appraisal, remember that a home observation made by someone other than an appraiser will also yield less than accurate results. This is because an inspector who is not an appraiser will not be nearly as aware of things that will have an impact on market value. Just some food for thought.

We all make judgements based upon what observe. That’s clearly true in appraising properties also. It’s important to remember that when it comes to understanding the appraisal process.

 

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Why Stats? Why Graphs? Why Data? Why Science – George Dell’s Analogue Blog