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?
If you liked this post, subscribe by email (or RSS). Thanks for being here.
I love your blog and I enjoy this topic. I’m an appraiser in the Portland, OR area and I too have blogged about this topic (please subscribe to my blog). I often review appraisals where the appraiser let the software pick the final value. I have a problem with that. When the computer selects the value, it passes the appraiser’s opportunity to use judgment about the quality of the data. The appraiser might know that the adjustments to a particular comparable are higher than the other; but, the adjustments are less subjective and therefore more accurate.
Thanks so much Gary. I appreciate the kind words. I clicked over on your blog. Great stuff. You make a good point, and I think it illustrates the limitations of a machine. Humans still win because we need judgment in real estate in the midst of data. It reminds me of a difficult one on my desk this morning. It’s just about wrapped up and I cannot wait until it’s gone. But ultimately I have to make a judgment call on what it is worth…
Hi, I’m a real estate broker and just wondering why the actual weights given to each comp is not required to be disclosed on the report. It blows my mind that appraisers must adhere to a pretty comprehensive set of guidelines in preparing and reporting an appraisal, yet at the end, can make a subjective statement that “the most weight was given to comp 1…because…” How is a reviewer of such an appraisal report supposed to reconstruct the valuation?
For instance, was 99% weight used for comp 1 while .5% given for comp #’s 2 and 3? Or was it 50% -35%-15% etc.? It just seems like a huge over site that it’s not required to report this. It leaves the door open (IMO) for engineering the data and ultimately sort of defeats the purpose? What good is a review if you don’t have enough info to check the work?
Thanks Daniel. I think your point is valid and it underscores that appraisers absolutely need to describe what they did and how they came up with the value. The hope is the reader would conclude, “Yep, I understand how the value was derived and this seems supported and reasonable.” But even if the reader doesn’t agree with the value, it should be clear how the value was derived. Personally I don’t like a weighted approach where funky percentages go to each comp. That doesn’t really make good sense to me because I don’t think buyers use that approach. Besides, if I gave 80% to Comp 1, why not 79% or 81%? It seems hard to support the rationale, though if it works and makes good sense for some, I’m open to hearing about it. In my reconciliation I usually say something like, “Comp 1 was given the most weight because it was most similar” and then talk about how other comps fit in the picture. I’ll discuss competitive price per sq ft metrics, trend graphs, number offers if relevant, and other data. The reconciled value is much more than listing the final number, but rather explaining it. One of the hallmarks of an inadequate appraisal is there is no property-specific information in the reconciliation section of the appraisal other than canned language that is probably listed in every report.
Thanks for the reply. An appraiser friend informed me that the percentages used are supposed to be disclosed. I went back to review two prior reports and saw that one did say the %s used while the other did not. I will review them more carefully in the future to see how many do vs don’t .
P.S. Great info on the subject. Thanks
Thanks Daniel.
I just received any appraisal with 6 comps, 4 of which are almost a year old (in a sizzling NJ market), and another that has yet to sell. Of the adjusted comps, some were as much as $80K higher, one was almost $40K lower, and none was within $20K of the appraised value. No explanation was given of relative weighting. It seems like a joke. The method is clearly PAYLOOYA (“Pick Anything You Like Out of Your A**”)
Thanks Bruce. I don’t have a problem with comps that are old as long as they are the best ones (and as long as the appraiser adjusts for how the market has changed). I do have a problem if it isn’t clear why the value was reconciled the way it was. That’s not how it should be because the reader ought to be able to understand that. The PAYLOOYA method isn’t officially recognized as a formal method, but obviously it’s used by some…
Thanks for the blog post and reply. Appraiser described market as “stable” even though prices have gone way up since last year, and he didn’t add any adjustment for market changes. The appraisal was in “QC” for 3 days. Something doesn’t smell right, frankly.
It’s a pet peeve when market conditions are not accurate. I can’t speak to your area of course, but it’s unfortunate when I’ve seen some recent examples in my area that definitely do not accurately show the market as increasing. Checking the “stable” box when the market has been on steroids is very out of touch.