A decision has to be made at some point. Appraisers eventually need to narrow down their research and commit to a final number for what a property is worth. But how does the appraiser decide on a value if all the comps adjust out to a different price? Is it a guessing game or is there a methodology?
Take a look at the example below. A home owner shared this appraisal with me (and gave me permission to post here). It’s a bit of a wonder why the value was reconciled to $488,000 when comps adjust out to $498,697, $482,800 and $460,800. There was no explanation in the report, so the seller in this case was scratching his head why the value was seemingly a random number at $488,000.
A few thoughts on picking the final number:
- Randomness: As shown in the example above, sometimes there is no explanation why a certain value was chosen. An appraiser seems to pick a number that really doesn’t make sense. Or maybe it does make perfect sense, but the reader doesn’t understand because the appraiser didn’t explain well enough. Appraisers should make clear why a value was selected, and this explanation should be found in the “Final Reconciliation” section of the report. Unfortunately many times there is a canned statement containing the same jargon that goes into every single one of the appraiser’s reports (as opposed to treating each appraisal differently and offering an explanation for why value was reconciled to a certain level).
- The Most Weight: Appraisers can give one comp the most weight in a report due to similarity and say other comps are given supportive or less weight. For instance, an appraiser might say that Comp 1 is most similar to the subject property in condition, location and layout, so the most weight was given to this property in the final opinion of value. Moreover, the appraiser can also explain why Comps 2-3 in this case were given less weight. It is okay if not all comps in the appraisal adjust out to $488,000 too, but obviously value does need to be supported.
- Different Strokes: Appraisers can consider different approaches to value in the appraisal report. For instance, in the case above the appraiser could have given weight to The Income Approach or The Cost Approach instead of the comps (Sales Comparison Approach). Of course the appraiser in this instance didn’t complete any of the other approaches, so that is not what happened. But theoretically an appraiser can use other approaches to value in the appraisal report and then decide which approach should be given the most weight in the final value.
- Weighted Approach: Some appraisers do a weighted approach to value, which means they might give the most comparable sale 50% of the weight in the final value, the second most similar comp would get 33% of the weight and the least similar sale might get 17% of the value. Personally I don’t use this approach.
- No Average: Appraisers don’t take an average of comps together. It is generally not a good practice when dealing with only three or so sales because such a small sample can really lead to a huge swing in value.
- Other: There are surely many ways appraisers can reconcile the value. Any appraisers reading are welcome to pitch in thoughts in the comments. Whatever is done, it should be explained and make reasonable sense.
Some Advice? I recommend looking at the comparable sales and reading through the report to see if there is an explanation why value was reconciled the way it was. This can help you understand the rationale of the appraiser (or lack thereof) and also assist you challenge the value if necessary.
I hope this was helpful.
Questions: Any thoughts, insight or questions?