What Is a “Conservative” Appraisal?

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Have you ever had your home appraised by two different appraisers, within a relatively short period of time? If you have, no doubt the opinions of value were a little different. That’s normal. While an appraiser may be asked to pinpoint their opinion of value to a single number, market value is usually in a range. 

The probability of two appraisers develop the same opinion of market value, on the same property, is very low. However, they should be generally similar if the appraisal parameters, including the scope of work and definition of value, are the same.

However, what if the opinions differ greatly? In that scenario, many would view the appraiser with the lower opinion of value, to be conservative. So, what does it mean to be conservative? 

When comparing two appraisals performed on the same property, the lower opinion of value is often viewed as being made by the more “conservative” appraiser. Is the appraiser really conservative, or could there be other factors involved?

A RECENT EXPERIENCE

Let me share a recent experience I had. It is not the first time this has happened, but it’s been a while, up until recently.

I was completing an appraisal for a bank. At the end of my home observation (inspection), the homeowner said that their home had been appraised about six months ago, for the same bank. The homeowner asked if I wanted a copy of the appraisal. Now, the only reason, in my experience, a homeowner offers to provide me with a copy of a prior appraisal, is because they are hoping my opinion of value is close to the former appraiser’s. I respectfully said that I did not need a copy, as I do all my own research and analysis. However, they had printed out the entire report and handed it to me. So, I took it. I figured I would just see what type of work my competition is doing.

My opinion of value was about thirty thousand dollars less than the other appraisal. Market conditions were flat, but certainly not in decline. Ironically, the other appraisal report stated that market values were increasing. Of course, no time adjustments were made in their report. Why was my opinion of value so much less than the other appraiser’s? Was I just being conservative, or were there other factors involved, that contributed to the relatively large difference?

FACTORS IN THE DIFFERENCES OF OPINIONS OF VALUE

The other appraisal had some significant issues. I am not going to get into them all. By the way, there are no perfect appraisers, or appraisals. I have certainly made mistakes. Every appraiser does! I am not trying to pick on another appraiser. However, there are some things, for which there are no excuses. 

For one, the other appraisal stated that the subject’s zoning was R-1. I analyzed the zoning of the subject. R-1 was not even an option on the zoning map! That tells me the appraiser did not perform a Highest & Best Use analysis. The appraiser had no idea whether the property being appraised, conformed to the current zoning. In this case, the subject did conform to the zoning, but the zoning was not R-1. In this case, it didn’t make a value difference, but it could have.

The other appraisal reflected an inaccurate gross living area. That did make a difference. The measurements the other appraiser had on their sketch, were exactly what the auditor’s website reflected.

I physically measured the home, and found that the auditor’s measurements were in accurate. The property had about two hundred square feet less gross living area, than the auditor reflected. Clearly, the appraiser had not measured the property. I know that they inspected both the interior and the exterior, as pictures of both were included their report. Why wouldn’t they have measured the home also? I have a feeling the bank would not be too happy about that.

The next issue I found was with the adjustments. In my analysis, I estimated that the market was paying between seventy and eighty dollars per square foot, for gross living area. I used two different methods, using data derived from the subject’s market area. Both methods came in very close to one another.

How much did the other appraiser use as a price per square foot? Twenty dollars a square foot.  The sales that the other appraiser used, ranged in price from mid three-hundred and sixty thousand dollars, to the upper four-hundred and thirty thousand dollar range. ($365K-439K) Does twenty dollars a square foot make sense for the most important component of value of the home, namely, its gross living area?  They must have used the “atmospheric extraction” method, as my friend Tim Andersen says. In other words, they PFA’d it. (Plucked from air)

Between getting the square footage wrong, and then using a price per square foot adjustment that is far below what the market is really paying, we ended up with a relatively large difference in value opinions.  Some of the sales that were used were up to six hundred sq. ft. larger than the subject property. Most of the sales they used had three and a half above grade bathrooms, vs. the subject that had two and a half above grade bathrooms.

There were other major issues with this report that I will not bore you with. But I think the point I am trying to make is clear. In this situation, it is not that I was conservative. The issue, at least in my view, is that the other appraiser did not perform their work in a manner that would lead to a credible (believable) opinion of value. Frankly, it’s not a matter of being conservative. It’s a matter of being competent.

I have also seen the reverse happen. An appraiser may have an opinion of value that is higher than another appraiser’s, because of due diligence and a proper analysis vs. a lack of property analysis, which may lead to a value opinion that is lower than what is realistic for the market. It works both ways.  

Therefore, when an appraiser is called “conservative”, and I have been called so many times over the years, I take that to mean honest. As I mentioned at the outset of this article, there is no problem with two appraiser’s having different opinions of value. That is perfectly acceptable, and  fairly typical. However, both need to have solid support for the conclusions. Usually, when both appraisers have solid market support, and meaningful analysis, their opinions of value are fairly close, with both falling into a range that is realistic for the market.

HOW TO DETERMINE IF AN APPRAISAL IS NOT SUPPORTABLE

So, how can someone, who is not an appraiser, determine whether an appraisal is lacking in support and analysis? That is a question that has frustrated me for many years, because I do not think most people are going to be able to recognize some of these issues.

I believe that the best way a homeowner, or any other person who is not an appraiser, can spot a potentially lacking report, is by reading the report in its entirety.

Did the appraiser comment on why they used the sales that the did? Did they comment on how they derived their adjustments? By the way, I have seen many appraisals that simply stated that they “extracted their adjustments from the market”. That tells you what they did. It does not answer how they did so. It should also be noted that adjustments are not always made, nor are they required to be made.  Whether adjustments are made, or not, is there meaningful commentary that helps you to understand how the appraiser developed their opinion of value? If the answer is no, a call to the appraiser, or in the case of a bank appraisal, a call to the bank may be in order. The appraisal I referred to above, had very little commentary. Literally a few sentences that really said nothing to the reader.  

It is important to make clear, that there are different types of appraisal reporting. There is the Appraisal Report, and then there is the Restricted Appraisal report. If the appraiser reported the appraisal in a Restricted Appraisal Report, then some of those questions might not be answered in the report. By the way, the appraisal I discussed in this article, was identified as an Appraisal Report, not a Restricted Appraisal. (Inquiring minds want to know)

I hope that you found this discussion to be helpful. Remember that the value of an appraiser’s opinion, has little to do with their opinion of value! The true value is the support and analysis they perform, which leads to the development of a credible opinion of value. 

Well, I am stepping down off of my soapbox now. Thanks for indulging me on this topic!

To end this week’s blog, close your eyes and play this song from Louis Armstrong. I like to close my eyes as I listen to this song, and pretend that I am in a different place and time. This may be a good time to do so. Enjoy the 3:45 minute trip. 

Thanks, as always for reading my post! Have a safe couple of weeks out there!

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Here are some links to other articles and podcasts I’ve enjoyed recently! I hope you will also…

Hip Hop Housing In The Dog House – Housing Notes by Jonathan Miller

Data-Point Zero – Voice of Appraisal with Phil Crawford (PODCAST)

Now Is Not the Time To Rely On an AVM – Home Value Stories (PODCAST)

How will the pandemic shape buyers and sellers? – Sacramento Appraisal Blog

Markets Changing? Free Webinars – UFO Homes – APPRAISAL TODAY