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?