Property appraisers don’t dictate what the value is. We merely research and analyze market data to interpret and then report what the market says the value is.
Many years ago, an appraiser friend (Ben was his name) asked me to go along on a challenging appraisal assignment to aid in data collection. On the way he needed to drop off an appraisal report to a lender client.
He handed the report to his client who quickly turned to the bottom of page two, and said: “Wow Ben, I was sure this one would have come in at least $20,000 higher.” Without the slightest hesitation, Ben pulled his chair a little closer to the client’s desk and said: “Me too…I thought it would be higher, but that’s what the market said!” He went on to explain how the market had said that, placing all the blame on that darned old market.
I can’t begin to count the number of times I’ve used Ben’s successful technique.
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The standard residential appraisal report form’s definition of Market Value states in part:
“Implicit in this definition is the consummation of a sale as of a specified date and passing of title from seller to buyer under conditions whereby:
- buyer and seller are typically motivated…”
So, this is a pretend sale between a typically motivated buyer and a seller. We need to explore who the most likely market participants might be. Are they owner/occupants or are they investors, for example?
- “both parties are well informed or well advised, and each acting in what he or she considers his or her own best interest;”
This pretend transaction involves parties who are adequately informed, acting rationally, and looking out for themselves. We wouldn’t want to do an analysis based on one or both parties being insufficiently aware, or with there being some ulterior motives at play.
- “a reasonable time is allowed for exposure to the open market;”
Reasonable exposure time is important in determining what “the market” says the value is. The property has to have been adequately exposed to the market. Reasonable equates to the Goldilocks principle of just the right amount of exposure on the market—not too long or too short.
- “payment is made in terms of cash in U. S. dollars or in terms of financial arrangements comparable thereto; and”
This pretend sale should be thought of in terms of U.S. dollars (cash or equivalent) and not Euros, Bitcoin, nor Monopoly money. The value estimate is standardized to be reported in U.S. dollars, no need to convert to a different currency.
- “the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”
Lastly, we need to think in terms of a normal transaction on this particular property, with no unusual financing or concessions by anyone affiliated with the sale.
So, it’s that darned old market that determines what the market value is. We, as appraisers, are only trying to find what the market says those typically-motivated, knowledgeable, or well-advised parties would agree upon for a sale price under typical conditions, as of a specific date, in our pretend sale.
To achieve our goal, comparable sales are sought that meet—or can be credibly adjusted to meet as closely as possible—the above criteria in the market value definition. Certainly, a sale of a property in a disputed estate settlement would be suspect as representing the typical market, as might a sale between family members, or a sale of a foreclosed property by the lender.
Many factors are looked at in identifying the market area to analyze, then any sub-market that may represent the buying market for the subject property. If nearby similar homes to your subject property are selling in the $100,000 to $125,000 range, it is very unlikely that your subject property is going to be worth $200,000 unless something very “atypical” is at play.
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A sales contract price on a subject property is just an agreed upon amount for the pending transaction between that buyer and that seller. It may or may not have anything to do with that property’s market value.
For example: I just purchased a vacant lot in town for $6,000. It was listed with a broker for $10,000, but I explained in my offer that I’d recently paid $5,000 for a similar lot a couple blocks away, and not long ago a friend had paid $4,750 each for two adjoining lots on the same block as the subject. I was willing to pay a little more because I’d been interested in that lot for a long time. Turns out there were some other offers on the lot that were a little less than mine.
In the above example, most appraisers would likely have read the market as saying the market value is around $5,000. I paid a price higher than that because I’d wanted that lot for a long time. I had actually written a contract to buy it fourteen years ago, but the owners didn’t want to sell it back then.
In hot markets like we’ve seen recently, when several buyers bid up their offering prices, it’s not uncommon for the winning bidder to find that darned old market’s typically-motivated buyers and sellers say the market value is less than the price the winning bidder is willing to pay.
So, when the market value in your appraisal report is questioned, just remember to use Ben’s tried and tested technique, and be prepared to explain how it was that darned old market that determined it.
Written by Steven W. Vehmeier. Steve resides in Florida where he is a state-certified general real estate appraiser and 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-90s, 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.
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