Most weeks I perform appraisals for divorce or a marriage dissolution.
In recent years, on several occasions, I have been hired to appraise a property after a valuation service was provided for my client by another real estate professional. They had hired the former real estate professional to value their property for the purpose of a divorce.
But then they had to hire me to perform an appraisal. That’s right! They had to pay twice to have their property valued. Why?
Because in both instances, they first had their homes valued by real estate agents, not appraisers. The opposing side in one of the cases required that a new valuation be completed by a state-certified appraiser. In the other case, my client’s attorney recommended having their marital property appraised. But the owner felt that a real estate agent could do the same type of valuation as an appraiser. And the agent they initially used was less expensive than hiring a certified appraiser. So what’s wrong with saving some money? After all, getting divorced is expensive.
If a real estate agent can price a home, surely, they can value it. But there is a big difference between pricing a home by a real estate agent vs. having it appraised by a state-licensed or certified appraiser. Let’s talk about the differences.
Most good agents do a lot of work when pricing a home. They will analyze market conditions and they will look for comparable sales that have sold in the area of the subject property in recent months. They then use a price-per-square-foot method to determine the asking price for the property. If they end up too high, the home will likely sit on the market until the price is reduced. If it is priced too low, the home will sell fast and in our current market situation, will likely be bid up.
Now, imagine that a real estate agent values a property for the purpose of a divorce. Let’s say that it goes to trial and the agent is called to testify about how they valued the property. What kinds of questions might they be asked?
Here are a few common questions that an attorney may ask in either a trial or deposition:
- What methodology or approach did you use to determine the value?
- What factors did you consider when evaluating the property’s worth?
- Can you explain the adjustments you made to the comparable properties to arrive at your valuation? (Assuming they made adjustments)
- Did you consider any relevant market trends or economic factors when determining the property’s value?
- Can you provide any additional information or documentation to support your appraisal?
Hopefully, the agent will be able to answer these questions. The first question above relates to approaches. There are three approaches to value that an appraiser will consider. The Sales Comparison Approach, the Income Approach, and the Cost Approach.
The Sales Comparison Approach uses competing homes to develop an opinion of the market value of the property being appraised. The Income Approach uses potential income to develop an opinion of the market value of a property, when applicable. The Cost Approach uses replacement cost less depreciation to develop an opinion of the market value of a property. All three are market-based approaches. Interestingly, each approach to value can help aid in the development of the other approaches to value.
Now let’s talk about some of the work appraisers must do to appraise a property.
MEASURING MARKET REACTIONS (ADJUSTMENTS)
Measuring changes in price is not rock science. But it’s not simply comparing median sales prices year over year in a zip code. When appraising a property, appraisers look at overall sales trends of not only overall properties, but we must then drill down to the trends of what competing properties are doing. With enough data, we can determine how much the prices of competing properties are changing daily. Not just annually.
That’s important because when sales prices are changing, and they almost always are, appraisers must make market/time adjustments to the sales prices of the competing sales used in the appraisal to reflect the change from the time the competing home we are using for comparison purposes goes under contract to the effective date of the appraisal report.
There are several methods that we use to make these measurements.
Appraisers will measure the amount that the improvements have depreciated when appraising most types of properties. Why? This assists us in developing support for the adjustments we make to the sales prices of the competing sales we are using in our reports for differences in lot size, bathroom count, finished square footage, basement size, and other features.
To determine how much the improvements have depreciated, except for condominiums, we must develop an opinion of the value of the site. This is not as simple as just using the assessor’s estimated market value. We must look for land sales or employ a number of other appraisal methods to develop an opinion of the site.
Next, we must estimate how much it will cost to replace the improvements as if they were new. So, we need to have reliable replacement cost sources to do so. It’s a lot of work.
DEVELOPING ADJUSTMENT SUPPORT
When adjustments need to be made for some of the components of a property, there are different methods we use to support our adjustments. We use a depreciated cost method, regression, paired sales analysis, grouped sales analysis, market surveys, income capitalization, and sensitivity analysis.
No one method works for every component of value. Therefore, we must understand how these work, and be able to recognize which ones are more reflective of the market.
HIGHEST AND BEST USE
Appraisers also must determine the Highest and Best Use of a property. There are a set of questions that we must answer to make this determination. We must determine if the current use is legally permissible. Therefore, we must find out what the property is zoned and then read the ordinances and consider market trends, and even future changes to zoning in order to make this determination.
We must determine if the use of the property is physically possible, financially feasible, and most profitable, or would a different use of the property bring more value. We must look at not only what the existing improvements offer to the land but also if the property were vacant, what would the highest and best use be.
Sometimes this is a difficult analysis to make. It can take a lot of time, and in some cases, it can make a big difference in value.
If a state-licensed real estate agent had the ability to appraise property with the same level of precision as a state-licensed or certified appraiser, an agent would not have to go thru the same process and testing that a state-licensed or certified appraiser goes thru, would they?
The education, training, and testing to become a state-licensed or certified appraiser are completely different than for becoming a state-licensed real estate agent. Why? Because they require very different skills.
I’m not comparing the two disciplines with the view of downplaying one over another nor am I implying that one is easier than the other. Both require a skill. I don’t have the skills and training to do the work that real estate agents do. I have a high level of respect for the hard and challenging work that real estate agents accomplish. But the same can be said for what we appraisers accomplish with our work.
It seems like some in the public, and even some agents, have a tendency to over-simplify what we appraisers must do. Of course, that may be due to many simply not understanding what we do behind the scenes. That’s one reason I started blogging years ago. To share with the public what we do and why we do what we do.
Hopefully, I shared some for thought here. If you need to sell your property, by all means, hire an experienced real estate agent. If my wife and are were to sell our property, we would. But if you need your property valued for something as important as a divorce or some other purpose that requires an opinion of value that is supported by recognized methods for valuing a property, beyond a simple price per square-foot analysis, hire an experienced state-licensed or certified real property appraiser. It may save you some grief, and even money, in the long run.
This week, I leave you with a funny video to make you smile.
Have a great weekend!
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Here are some links to other articles I think you might also enjoy…
The Rental Housing Market Is The new Combat Juggling – Housing Notes by Jonathan Miller
Phil welcomes… Dr. Mark Calabria!!! – Voice of Appraisal with Phil Crawford
How a Retrospective Appraisal Can Help In The Estate and Tax Planning Process – Birmingham Appraisal Blog
Chat GPT For Fannie Form Appraisal Reports – APPRAISAL TODAY
How Do I Move to EBV? Part II – George Dell’s Analogue Blog
Graduation for the spring housing market – Sacramento Appraisal Blog
Feeling The Pressure – The Real Value Podcast with Blaine Feyen
USPAP and All Information Necessary – Tim Andersen, The Appraiser’s Advocate Podcast
For my readers in the CLE area… here are some articles related to news in our local area that you may enjoy…
Enhancing nature: Metropark’s Zimmerman has spent past 13 years on improvements, more to come – Grant Segall of Freshwater Cleveland
13 Stunning Ohio Caves You Can and Should Explore – Cleveland Scene
4 thoughts on “The Difference Between Pricing a Property and Appraising It”
Nice job Jamie. Agents and appraisers do have different strengths and weaknesses.
Thanks Joe! Yes indeed! I respect both disciplines greatly! I hope you’re doing good my friend!
Agree with Joe. There are strengths and weaknesses to both. And there is always a reasonable range of value too. I think appraisers and agents can learn so much from each other. Keep up the great work, Jamie.
Thanks Ryan! So true!