Imagine 3 appraisals on one property, and all of them have a different value. How can appraisers have any credibility when there is so much difference? I hear this question all the time, so I wanted to pitch in some thoughts to hopefully strike a balanced conversation for home owners, agents, and appraisers. Here are three points to consider for perspective. Any thoughts?
- Range of Values: We like to think value is incredibly precise, but one of the best things we can do is realize there is a range of value in real estate. This means realistically buyers might be willing to pay anywhere between $330,000 to $340,000 for a particular property instead of such an exact figure of $334,568. The same is true when we buy a new car or even buy something on Craigslist. Rather than being tied down to one exact figure, we often recognize there is a price range we’d be comfortable paying. We might think of a Camry as having a value anywhere from $21,500 to $23,000 or a used bookcase being a deal between $55 to $65. Real estate works very similarly, though since appraisers have to put an exact number in an appraisal report for lending purposes, we are stuck with that exact figure.
- If I asked 3 Agents: Since appraisers give a written value for a property, it’s easy to criticize the value (rightly so). But if I asked three real estate agents to give a precise written and supported value for a property, chances are I would get three different values, right? This would be especially true for a custom home or something that is unique or lacking decent comps. I bring this up because it takes real skill and time to nail a value, and there is going to be a difference in opinion even among qualified and respected professionals throughout the real estate community – whether appraisers or agents. When speaking in real estate offices and this point arises, I often ask, “If I asked 10 different agents for a value on a property, what do you think the result be?” While it sounds like a cop out to gloss over bad appraisals, there is a valid point here.
- Quality Spectrum of Appraisers: Lastly, it’s worth noting there is sometimes a difference in values because some appraisers simply do a better job. Remember, an appraisal is about two things: 1) Comps; and 2) Adjustments. When comps or adjustments are out of sync with the market, it’s easy for value to be out of line. This is the part where the appraisal industry has a black eye, and it certainly deserves criticism when an appraisal is not what it should be (whether too high or too low).
The Pain of 2 Appraisals: While it’s perfectly reasonable to see a minor difference in value among appraisers (or any real estate professional), the reality is lenders sometimes require two appraisals when a property has been flipped or even when a property is very unique. We all know this can lead to turmoil for a transaction if one value is at or above the contract price and the other is below. This is why it’s best for a transaction to have just one appraisal, and better yet, to have a lender who understands the above issues and can be reasonable when there are two different values on one property (hopefully the values are somewhat close).
I hope these points are helpful for framing the conversation next time this issue comes up. I’d love to hear your take in the comments below.
Question: Any thoughts or stories to share? What other points would you put in here?
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Good article Ryan. Appraisers make hundreds of small decisions within every appraisal assignment. Each adjustment must be reconciled and each indicator must be reconciled. I could see a situation where I appraised the same property on three different days, all for the same value date, and I might come to slightly different conclusions each time.
Thanks Gary. There are so many things to consider. You’re so right about that.
Ryan – Great food for thought as always. Maybe this is fodder for another post, but my question is as a consumer and not being familiar with the appraisal industry, what mechanism is there to handle inaccurate appraisals?
As you tacitly admit, clearly there are less stellar appraisers creating bad appraisals (hey, every industry has bad apples). So as a hypothetical – what if there is a unique property and an appraisal is done and it is way off (say it is several standard deviations off of the range of values that 9 out of 10 appraisers would consider correct). What if the aggrieved buyer/seller has another appraisal done that is accurate (and 9 of 10 appraisers would agree with its accuracy). How is it sorted out? How often are appraisals rejected by lenders? Should I have any faith that a lender would know which one is more accurate?
Maybe you have touched on it before on the blog, but what protections does the industry have for appraisers who are not providing accurate appraisals, or even worse, are intentionally manipulating appraisals? Is there a discipline process, and is it effective? As a consumer, I don’t ever hear about this.
Thanks again!
Great questions, Jeremy. Thanks for bringing them up. There is always going to be a range of values with a complex property, but if something is off very significantly, that is a problem. Lenders do have a rebuttal process where Borrowers / agents can challenge a bad appraisal, but results are mixed of course. I’m not on that side of things, so I don’t really know how often appraisals are rejected. I do know sometimes as consumers we may not agree with everything about the appraisal, but we still like or agree with the final number. I’ve even had that experience before where I knew the contract price was solid, and I was highly comfortable paying that amount based on other sales and listings in the neighborhood, but I wasn’t a huge fan of the appraisal. I think the appraiser’s value was good, but the way the appraiser got there and some adjustments that were made and not made were questionable. But as a consumer I’m just glad it went through. Lenders do have review departments. While I wouldn’t say we should have faith in lenders or the lending process, we can know there is at least an appraisal review process in place to help manage appraisal quality. Theoretically a loan should not be made on a really bad appraisal, but I’m sure that still happens. Consumers can file a complaint with the Bureau of Real Estate or Office of Real Estate Appraisers (or whatever it is called in each particular state). The state holds the appraiser’s license, and can discipline the appraiser in many different ways or even take away the license. Someone I know was disciplined and sent to take mandatory education, and it was very effective. The threat of losing a license is huge. Yet I’m sure there are examples where it was not effective. I can tell you whenever the state gives a presentation, it’s always a scary presentation because no appraiser wants to ever hear from the state.
Thanks for the response! Really appreciate your insights. Like most professionals, I am sure that getting threatened with being reported to your licensing body would cause major heartburn. But glad to know that they are out there hopefully telling all the other appraisers to be more like you!
“Like most professionals, I am sure that getting threatened with being reported to your licensing body would cause major heartburn.” So true Jeremy. I appreciate the kind words. I’m not a perfect appraiser (there is no such thing). 🙂
There are a couple of other elements to appraisal that come to mind than just comps and adjustments. Observational skills and experience I would think would also weigh heavily in the mix of producing precise opinions; particularly in high line homes. It is an artful business as well.
You stated that perfectly, Mark. Thank you. That’s really what I’m getting at when I say it’s all about comps and adjustments. We have to see the comps and adjustments in the right context of the neighborhood market. When we don’t, it’s easy to make mistakes by making the wrong comparisons or the wrong adjustments. This is why I tell anyone challenging a low appraisal to forget about clerical errors or misspelled words and to look at comps and adjustments (the meat of the appraisal). Of course there are other appraisals where we are looking at how much income the property produces and such, so it’s not just a matter of sales and adjustments always too.
I certainly understand that 3 good appraisers are going to come up with 3 different values for a property but they’re likely close.
How close is a good appraisal to the “real” value? Within 1%? 2%?
To say it another way, if you did a pre-listing appraisal, would you tell the seller, “The appraised value is $X and it should sell within Y% of $X. What’s Y?
John, I appreciate your comment and recognition there is always a margin of error. I actually do exactly what you said in the bottom paragraph with my pre-list appraisal services. From the get-go I tell my client I will give a specific value, but at the same time I am going to talk about the realistic range of value for the property and for the neighborhood market. I discuss the range of values in a couple paragraphs on the very first page of the appraisal so my client can get a sense for the market. This might help them be more realistic about the market and realize that not every single buyer is going to be willing to pay the same amount. The final number of course is selected and represents what most buyers will pay (market value after all is the most probable price a property should bring in an open and competitive market), but nonetheless there is still a range of values to entertain.
Excellent article!
Thanks so much Nedy.
A running theme here is “Absolute” in the context of the valuation/appraisal of real estate. As stated by the comment “ask three agent/brokers for the value of the same property”- you will get a variety of values. Also ask three stockbrokers where the market is headed- all different answers, three doctors on health-yep, three lawyers on the law-all different, and finally the proverbial question of three people watch the same accident – you’ll get three different versions. Nothing is absolute; this is a standard fact of life….exception – to the untrained eye of the subjective real estate participant that has motivation in the outcome. There lies the art and the dodgefull eye of the appraiser. It’s no secret that appraisers are the scapegoats of every mortgage crisis.
Nail on the head. Thank you Tom. Excellent comment. We have so much data at our disposal these days that we like to think we can hone in on an absolute value, but there is always a range to a certain extent, and we can be humble about that. I gave a deposition recently, and the lawyer asked me what the margin of error was. He specifically asked if 1-2% was reasonable, and I had no problem saying “yes”. So true on being scapegoats.
I guess I can’t narrow it down to a specific rule of thumb percentage, each house is different.
Thinking about it, I can see the range would be very narrow for a standard model in a subdivision and very wide for a custom luxury home.
I love that you discuss the range in writing on the pre-listing appraisal. It would certainly help the seller set more realistic expectations on final sales price.
Thanks for the response.
I think you said it well there, John. The range tends to be smaller when we have ample data, but then it seems to get larger at higher price ranges where values tend to fluctuate more. This conversation usually goes something like this though: “One appraiser came in at 1.2M and the other was 950,000.” That’s probably too wide of a range. Something is not right there.
Well said Ryan. Appraisers do get beat up on occasion when 2 or 3 appraisers come up with 2-3 values but I like your thought of comparing it to agents coming up with a list price. Great stuff and good conversation.
Thanks Tom. I find the real estate community tends to ignore points 1 and 2, while gravitating to point 3 in the post. I can understand that for sure, but I’m just saying we still need to keep points 1 and 2 in the conversation somewhere when appraisals are reasonable and supported (but have different values still).
Thanks for the response! Really appreciate your insights. Like most professionals.
Very good article for home appraiser we can know How can appraisers have any credibility when there is so much difference. thanks for sharing with us.