There’s No Correct Answer in Appraising

Two real estate appraisers discussing home values, market trends

The very first truly knowledgeable” (one with an insight, understanding, or clear perception of a truth, fact, or subject) property purchaser I met was nearly four decades ago. In this case, he was also the client. He was buying an 1800s Victorian house in which his parents had operated a retail business for many years. His intent was to buy the house from his parents and relocate his law offices there. He ordered appraisals from three different appraisers, and the purchase price was to be the average of the three value opinions. He knew there’s no correct answer in appraising.

A homeowner once complained that my value opinion in an appraisal report done for a lender client was $1,000 less than another appraiser’s opinion in an appraisal report she’d ordered on her own a week earlier. She threatened to turn me in to the State because she said: “It’s against the law for two different appraisers to have different value opinions.” I’d call her “ignorant” (lacking in education, training, or knowledge…a person who is ignorant is one who is uninformed or is unaware of a subject or fact). Why? Because there’s no correct answer in appraising.

The Employee Relocation Council (ERC) knows there’s no correct answer in appraising. A long standing policy has been that when two appraisers’ opinions are within five percent of each other, both are just fine, and the two are averaged.

Remember the Three C’s of Underwriting: Credit, Capacity, and Collateral. If the collateral’s appraised value estimate is a few percentage points below the number needed by the underwriting guidelines, looking to the other “C’s” is the appropriate procedure, rather than 1) automatically denying the loan, 2) blaming the appraiser, or worst of all 3) pressuring the appraiser to change their opinion. Why? Because there’s no correct answer in appraising.

Unless there’s an obvious error, it seems “absurd” (silly, irrational, or ridiculous) to me to engage a professional for their opinion, and then pressure them to change it just because their opinion is not the result you wanted to hear.

 

I would think in theory, if the real estate brokers did their jobs appropriately, and the buyer and seller did theirs, and were knowledgeable or well advised, and acting in their own best interest (plus all the rest of the standard Market Value definition criteria), and the appraiser was not given a copy of the sales contract, about half of appraisals would likely be at or a little above, and about half at or a little below the contract purchase price in most cases.

So, what if a client provides a sales contract to the appraiser after the report is completed, and the appraised value estimate is five percent above the contract price? Is the client going to fuss? Not likely. Conversely, what if the contract price was five percent higher than the appraised value estimate? Now, supposedly, the appraiser must have made a mistake. That’s “crazy” (senseless, bizarre, or insane).

Try this: Randomly select ten appraisers from an active selling market area, ask each of them to appraise the same house, and tell them it’s for a second mortgage.

  1. Will they all come to the same dollar value conclusion? NO.
  2. Unless there were only three acceptable sales in the past couple years, will they all likely select the same comparable sales to use in their appraisals? NO.
  3. Will they all make the same dollar amount adjustments to the comparables? NO.
  4. Should their value conclusions all fall within a reasonable range? YES.

Years ago, I was one of three appraisers selected by a lending institution to each appraise forty units in a large apartment project that was proposed to be converted to condominiums, as if they were already condo units. Each of us was to appraise an end and interior unit, on every floor of the dozen or so buildings. Did we all use the same comparables, make the same dollar adjustments, and reach the same conclusions? Of course not. Did our opinions fall within a reasonably tight range? Yes, they did!

Appraising is NOT a simple math formula/algorithm. “Two plus two equals four” has a correct answer. In contrast, appraising is a process of developing and reporting a supported OPINION of value utilizing recognized methods and techniques and does not have a single “correct” answer. It is a judgement, based on that appraiser’s education, knowledge, experience, and the data analyzed. There’s no correct answer in appraising.

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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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