Two appraisals are completed on the same property. Each appraiser has a different opinion of the market value. Which one is accurate? Can they both be accurate?
Occasionally, I read articles or hear of companies that refer to the appraiser’s “accuracy rate”. I’ve always wondered how this is possible to measure. After all, an appraisal is an opinion of market value. Interestingly, if you look up the word “opinion” on www.dictionary.com, one of the definitions is, “a personal view, attitude, or appraisal.” Another is, “The formal expression of a professional judgement”. Can an opinion, or a person’s professional judgement be measured?
Perhaps. But against what? Another person’s opinion? And what makes their opinion correct? Perhaps some measure an appraiser’s accuracy by how many times their opinion of value is the same as the contract price on a purchase. I sincerely hope that no appraisal is ever measured in such a way.
What would be the purpose of the appraisal? What if two people agreed upon a price that is far higher than what other comparable homes are selling for in the neighborhood? If the appraiser’s opinion of market value reflects what other comparable homes are selling for, which may be lower than the purchase price, does that make the appraiser’s opinion inaccurate?
That type of measurement may make sense for those who feel that market value is simply what two people agree to pay for a property. Of course, those that feel that way are typically ignorant about what market value really indicates.
IS MARKET VALUE A SINGLE NUMBER?
Sadly, for many years, the forms upon which most appraisals are report on, may lead the reader to believe that the appraiser’s opinion of the most probable sales price of the home, in a hypothetical sale, is the value. When, it is not. While appraisers, in the mortgage lending arena, are forced to provide their opinion of value in a single number, the reality is that the market value of any property is really in a range of potential prices. Why?
How many buyers are there in a given market area? Certainly, more than one. In some markets, it could be thousands. Can one number reflect the views of every market participant? Some may pay a little more for one property than another would, because in their view, that home fits their needs better than another comparable property in the same area. So, they may be happy to pay a little more than someone else who may also be interested in the same property.
Furthermore, people are different. We think differently. Buyer’s motivations are different. Even between two people interested in buying the same home. Can one number capture all these people’s views? Clearly, providing a value range is a more supportable reflection of the market value of a property. The range does have to be realistic though. If it is too large, then it will lack credibility.
You may be thinking, “what is a good percentage to go with?” A five or ten percent range? I wish I could give you an answer. The range depends on the characteristics of the home being appraised, what other generally comparable sales are selling for, and the market the property is in.
Getting back to those two appraisals with different opinions of value. Can they both be supportable? Yes, they can. They may both fall within the range of what is a realistic value range. Which value will be closer to what the home actually sells for? That will depend greatly upon the people who make an offer on the property. As mentioned earlier, one member of the market may be willing to pay a little more for a property than another might. But both may be willing to pay a price that is generally typical of what other comparable homes are selling for.
AN IMPORTANT ASPECT OF THE APPRAISER’S OPINION
You may wonder, “If the appraiser is just giving me their opinion, even if it’s in a range, what makes their opinion credible”. That’s a great question! The report most be credible. The 2020-2021 version of the Uniform Standards of Professional Appraisal Practice (USPAP), uses the term “credible” 276 times. What does it mean to develop a “credible” report? USPAP defines this term as being “worthy of belief”.
What makes an appraisal worthy of belief? USPAP goes on to state that it requires “support, by relevant evidence and logic, to the degree necessary for the intended use.” Clearly, competency is required. Appraiser’s have been trained with the skills to provide the necessary research and analysis, in order to develop an opinion of value that is worthy of belief. The appraisal process is far more than picking a few sales and then adding them to a grid on a form. There is a lot of analysis that takes place.
This includes a careful analysis of market conditions and neighborhood characteristics. The appraiser must perform an analysis of the highest and best use of the property being appraised, as well as the comparable sales, since a sale that does not have the same highest and best use as the property being appraised, is not considered to be comparable.
Each of the comparable sales used, must be analyzed to determine the similarities, as well as the differences, when it comes to things like location, quality, condition, size and so on. Adjustments may need to be made to reflect market reactions to these differences, if there are market reactions. If there is not a market reaction to a specific feature of a property, an adjustment would not be warranted. For instance, in some markets, people may not typically pay any more for a home with a fireplace than one without. Therefore, no adjustment would be made for this amenity.
In other articles I have written, I have talked about some appraisals I have seen, in which the adjustments were not market supported, at least based upon my own research and analysis. The adjustments must be derived from the market, not made up. The appraiser must have support for their adjustments, in their work file. The adjustments must also be worthy of belief. To use hyperbole, say an appraiser adjusted one dollar per square foot for gross living area, on a home in which other comparable homes were selling for around $500K. Does that seem logical? Does that sound credible? To most, one dollar per square foot for a property like this, would clearly not be realistic, or worthy of belief. Adjustments must be supported by solid market data.
One thing I find interesting about adjustments is that, when they are truly derived from the market and applied properly, they usually tighten the adjusted range of the comparable sales. Whereas, made up adjustments often do not.
By the way, when it comes to adjustments, market derived adjustments come in a range, just like the market value of a property, which makes sense, don’t you think? But the adjustments should fall within a range that is supportable and worthy of belief.
HOW CAN YOU TELL IF THE OPINION IS SUPPORTABLE?
While most readers of an appraisal report, may not be able to determine if the appraisal is credible, there are some indications that one may not be. I always recommend reading the entire report. Does the report take the reader down a path that makes sense, from the neighborhood description all the way to the opinion of value? Does the appraisal report explain what the appraiser did and why the did it? Does it explain why the appraiser used the comparable sales that they did? (Sometimes, it is also important to explain why we didn’t use a particular sale) Did the appraiser explain what makes one sale a better market indicator than another? Did they explain how they developed their adjustments? Did they explain how they ultimately developed their opinion of value?
If the appraisal fails to answer these questions, it may be an indication that the opinion of value is lacking support. The support, analysis and overall development of the appraiser’s opinion of value, is key. If the appraiser provided the proper support and completed the proper research and analysis, chance are, their opinion of market value will be worthy of belief. It will be credible.
There is really no way to measure the accuracy of the appraiser’s opinion of value. While that is the case, the appraisal must be credible. It must be based upon data and analysis that supports the appraiser’s opinion. That data and analysis needs to be in the appraiser’s work file. Interestingly, state boards don’t sanction appraisers because of their opinion of value. Appraisers get in trouble because they made substantial mistakes in their development and/or reporting of their opinion of value.
There are many things that can be measured! Human body capacitance for instance. Which, naturally leads to the question, which hurts worse, AC or DC? Find out in this video. And don’t try this at home!
Well, hopefully you found this topic to be helpful. Thanks so much for being here, as always! 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…
How Many Zoom Calls Does It Take To Stabilize A Housing Market? – Housing Notes by Jonathan Miller
Home prices during the pandemic – Sacramento Appraisal Blog
Unintended Consequences of the Coronavirus Pandemic – Birmingham Appraisal Blog
Refis to Surge – Selling Over List – What’s Happening in Your Market? – APPRAISAL TODAY