I’ve been teaching and writing courses for McKissock for 20 years. During that time, we’ve offered several courses on appraising “oddball” or “complex” properties. If you’ve never taken one of these courses, I strongly recommend that you do. Despite the rise of AVMs in recent years, these types of assignments continue to require competent, boots-on-the-ground residential appraisers.
Appraisers are not going away
For years, industry pundits have been predicting the eventual demise of the residential appraiser. Not so long ago, these doomsayers stated that the AVM would replace the residential appraiser. My reply to these prognosticators is that residential appraisers are not going away, but rather how they perform appraisals and how they communicate their opinions will be changing significantly due to technological advancements, and over time, we probably won’t need as many appraisers as we have in the past.
For instance, in Florida there were 14,995 appraisers on November 30, 2008 (renewal deadline date); however, on the following morning (December 1, 2008) there were just 9,510 because roughly a third of the appraisers did not renew. Since then we’ve lost about a third more. We needed the pre-2008 number of appraisers to handle the boom years leading up to the housing bust, but didn’t need them all after the bust. The question then becomes, how many appraisers do we need today? That’s actually a very good question. I think going forward we probably won’t need the number of appraisers that we have today.
There are those who continue to sing the praises of AVMs and other regression/modeling tools, and continue to claim that these tools will ultimately be the residential appraiser’s demise. Many appraisers do utilize regression tools in their daily practice, and understand that the reliability/credibility of regression results depend on the quality and quantity of data available.
Areas where AVMs are unreliable
Although AVMs do, and will continue to, fulfill some clients’ needs in some circumstances, there is one area in which they typically are not considered reliable. That area is “complex assignments,” the unique and oddball properties that continue to require competent, boots-on-the-ground residential appraisers. Specialization in this type of assignment can be very profitable for the residential appraiser.
The Dictionary of Real Estate Appraisal (6th Edition) defines the complex one-to-four-family residential property appraisal as: “An appraisal in which the property to be appraised, the form of ownership, or the market conditions are atypical…” This is where the competent residential appraiser shines.
Tract housing in suburban areas is typically where AVMs shine, and there are properties or circumstances in these markets in which lenders will utilize AVM type tools to make lending decisions rather than rely on a traditional appraisal. But when the complex assignment shows up, it’s probably not the smart way to go.
Example: Houses in small towns
Below are just a couple examples of AVM inaccuracies that I found from my small-town market of 685 single family homes:
- For nearly a year, one of the top online real estate websites estimated one of my rental houses to be in the low to mid $300,000s. I paid just $48,500 for it in 2015, put $6,000 into remodeling and would have been happy with a sale price around $100,000.
- Currently, another one of my rental properties is showing an estimated value of $573,500 on a competitor’s website. In this case, I paid just $30,000 for it in 2014 and put $7,000 into remodeling. To be honest, I’m not that good at picking a diamond in the rough that would return almost $536,000 in profit.
Appraisals of houses in small towns, like the two mentioned above, are just one example of challenging assignments for even the seasoned appraiser. Machines often do not do well in such locations, generally due to a shortage of, or even a total lack of, sufficiently applicable data for statistical reliability. Hmmm, I wonder if I could get a $500,000 loan on that second property?
Other complex appraisal assignments
In Florida and other states, complex assignment challenges can include water features like:
|✔ water view (and permanence thereof)||✔ water access||✔ water depth|
|✔ water quality||✔ seasonal fluctuations||✔ tidal and wave action|
|✔ people and boat activity||✔ level of salinity||✔ riparian rights|
|✔ navigability||✔ legality of docks||✔ seawalls|
|✔ erosion||✔ waterfront||✔ submerged lands|
Situations often exist where very similar houses, sometimes next door or just a short distance away, can have radically different values due to one or more variations of these factors. This is where local knowledge and competency that can identify, understand, and properly account for these differences is required and where estimating value cannot be simply based on regression analysis and a math formula.
Adapting to changes in the industry
Some of the previously mentioned appraiser attrition in the industry was business volume related, but for others who left since then it may have been because “somebody moved their cheese” (i.e., how things were always done changed, and their business model no longer fit the current business market). Generally, appraiser population numbers are tied to lending market activity—something we can’t control. But as with many other fields, when somebody “moves the cheese,” it doesn’t always disappear, you just have to find out where it went, make some changes in how you do things, and execute a new business plan.
Over the coming months, we’ll be adding additional blog posts on appraising the complex and often higher-fee assignments. We’ll talk about the advantages and disadvantages of these assignments and how to find this type of work. In addition, we’ll present several examples to help you identify complex assignments and develop procedures for dealing with the challenges presented by this market segment.
Interested in complex property appraisal? Experienced and novice appraisers alike will enjoy our CE course: Complex Properties: The Odd Side of Appraisal.
Written by Steven W. Vehmeier. Steve resides in Florida where he is a state-certified general real estate appraiser, holds a general appraiser instructor permit, and is a licensed real estate broker. He has taught appraisal qualifying and continuing education courses for multiple colleges, professional appraisal organizations, his own school, and McKissock Learning since the mid-90’s, often spending over 100 days a year traveling and teaching. He has authored dozens of appraisal courses and textbooks, including several for McKissock, and has been a member or affiliate of eight national appraisal organizations, and national director of two.