My appraisal was 20% higher than the other appraiser. That’s what the attorney told me after I sent in my report. My first thought was, “Wow, I’m surprised”, and my second thought was, “Yikes, I hope I didn’t get it too high.” Long story short, the reason why there was such a huge disparity in value came down to comp selection. I chose properties that made reasonable sense for the subject, and the other appraiser chose homes that on paper looked like they could be the right ones, but in the end they were too low.
How can value be so far off? Well, let’s take a quick look at this situation and consider some key points for choosing comps. Even if you aren’t from the Sacramento area, what do you notice about my comps and his comps? (Note: I removed addresses and moved the subject property icon slightly to obscure its location).
The Comps – Explaining why there was a 20% difference in value:
- Closer to Main Street: The other appraiser chose sales that were either on a busy street (Lincoln Ave) or closer to a main street (Fair Oaks Blvd). Of course it’s fine if sales with a busy location are used, but we have to consider if a value adjustment ought to be given.
- Court Location: This is a key point. If you look closely, two of the other appraiser’s “comps” are located in court-type streets off Fair Oaks Blvd. These “court” locations are subject to increased traffic noise from the main street, but they also don’t have the same feel as the subject street. The court location basically has only one street of homes instead of multiple walkable streets with a more traditional neighborhood feel. We have to consider if there is a value difference here instead of blindly calling these locations similar.
- One-Mile Radius: The appraiser’s sales are located within a one-mile radius, but that doesn’t mean they are reasonable for use. Just because a sale is within a mile doesn’t mean it’s automatically a “comp” (key point). After all, there is a difference between a “sale” and a “comp”.
- Older vs. Newer: Just because it’s a newer sale doesn’t mean it’s the best “comp”. Fresh sales are ideal, but sometimes older sales are more relevant – especially if they are in the immediate neighborhood and require less adjustments than new stuff that’s really less similar (I’m not saying we should pass up new lower-priced “comps” for older higher sales). In this case the other appraiser chose newer sales that were less similar instead of older more similar sales. The irony was there was an older similar property that closed 2.5 years ago on the subject street for 5% higher than the other appraiser’s current value. Since the market has increased in value over these past years, this one sale alone could have been a tell the appraised value was simply too low.
- Deep Study: It’s easy to value something in a tract subdivision with model match sales galore, but it can be tricky when working in an area where values differ tremendously from street to street. This is why it’s critical to dig deeply to find how the market really views the subject street and property. I recommend finding sales on the subject’s street (even if they’re older) and asking yourself how these homes compared to the rest of the market at the time of their sale. What sold at a similar level? This type of research helps us see the context of how the subject street might fit in the overall picture of value. Also, if the subject sold in the past (and it was a legit sale), how did it compete with other sales at the time? What did it really compare to? That might also give us clues into the market. The truth is we might need to look through years of sales in the immediate neighborhood and spend multiple hours crunching numbers and scribbling notes so we get a sense of the context of value. If you’ve only struggled for 15-30 minutes, chances are you need to keep looking and continue to make comparisons and seek out advice until you get a good sense of how value tends to work on the subject street and in the immediate area. Otherwise it’s easy to pick nearby sales and call them similar even though they might trend much differently.
I hope that was helpful. Please know my goal isn’t to say my appraisal was perfect (there is no such thing) or to throw another appraiser under the bus. I love my colleagues. In this case there was a clear value difference and frankly the other appraisal just wasn’t reasonable.
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Questions: What do you see about the comps above? Any other tips for choosing comps? Anything I missed? I’d love to hear your take.
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Great post as always Ryan. i have been in your shoes many times with another appraisal so different from my conclusion. However, it is always easy to explain the differences when comparing the two. This is a good example of why two appraisals are often ordered for divorces, REOs, and relocations.
Thanks Gary. I suppose that’s one benefit to having two appraisals that you can look at them and weigh credibility. What really makes sense? Sometimes it can be helpful this way, but other times if the parties don’t know real estate it can be a disaster for them.
My local MLS allows me to run a CMA report (it’s just a couple extra clicks of the mouse once the all relevant transactions are selected). It produces a single line item list of all transactions and a good statistical analysis that I include in the addenda of my private appraisal reports (I don’t do this for lender work…it can open a can of reviewer worms). It serves as a ‘reasonableness check’ against my opinion of value. If there is a significant difference between the calculated average value and my opinion of value I explain why. If your local MLS allows a concise CMA report printed to a PDF I highly recommend using it. This method only takes a couple of minutes and lends a good deal of credibility. In your case may have helped demonstrate the validity of your value opinion.
Right on Mike. I appreciate the tip and I like it. Going out of your way to help support your value and paint a picture of credibility is fantastic. I think your idea can be useful in certain cases. I’ll keep that in mind in the future. I know it’s probably a big shocker, but I use quite a few graphs in my reports to help show the market visually.
Ryan: This is a good example showing when ‘trickeration is a’foot.” One appraisal attempting to provide substance and credibility. Another effort suggesting something is awry, when it is placed under the scopes of ‘reasonable and realistic” review. As Gary K. stated, there’s a reason attorneys quite often order separate appraisals when there”s some type of issue or contest involved in their case. My fallback has always been “location, location, location.” Then I get down to the other elements of comparison. Reasonable and Realistic? That of course, is determined at the end, and left to the interpretation of the viewer(s).
Thanks so much Lou. I appreciate your take. I agree about “location, location, location.” We really need to spend time being sure we are giving the location its proper justice. This shows respect for the market.
Thanks for this post, Ryan. We find this sometimes with relocation appraisals as there are typically 2 appraisals and sometimes even 3 appraisals ordered for the same property. It is always good to explain your reasoning for comparable selection or adjustments. Mike Turner’s suggestion is good too.
Thanks Shannon. Great example. Yes, you are right. Explain, explain, and explain. Of course that comes after research, research, and research.
It would also be interesting to see how any active listings or pending sales fit into the picture as they may have indicated exactly what you are saying.
Great point Tom. We always have to look at the actives and pendings (and even withdrawn listings can be helpful). It’s definitely trick when we’re not in a conforming tract neighborhood, but data is there. We just have to really work to see it in the proper context.
One question that comes to mind is, when observing the location of the six sales, I noted that all of yours are to the west and all of the others are to the east. Since I do not know where the neighborhood boundaries are, I am unable to make any judgements about whether any of the comparables are within the subject’s neighborhood. If they are all located in the subject’ neighborhood, then it is not an issue.
I only mention this because of the “one sided” configuration of the sales.
Great observation Russell. I did move the subject icon a bit on purpose (as noted above). If I moved it to the precise location it would be very close to a certain comp I used. Even without being moved though, the comps I used are within the market area and all have a closer proximity to the American River too (which is important here). Fair Oaks Blvd can be a sort of line of demarcation so to speak as values tend to increase to the south. Two of the other appraiser’s “comps” are south of Fair Oaks Blvd technically, though it’s critical to note they are located in courts, which is really a different location much more subject to traffic noise.
Great post! Sorry to have missed your class on blogging, hope you had a lot of folks.. if you do another one I’ll be there. Before your post I was thinking walk-a-ability in a neighborhood is important to many folks of all ages. But mostly thinking about the closeness to stores & restaurants. Thanks for pointing out that you also consider the larger picture as well. I definitely agree, now that you brought it to my attention. A dead end street off of a busy street doesn’t have the same flavor.. and for many years of walking/ riding bikes around the block with the kids/ dog is so much a part of being in a great neighborhood .. you would have thought I would value my experiences about bringing more value to these homes! Thanks for your posts, love them.
Thanks so much Nancy. We had a great class yesterday. It was a comfortable 15 people and so much fun. I appreciate your thoughts. I think there is something about biking and walking around the block. Though if there was a gated community of custom homes in a similar court location, we’d have to consider what that might do for value. It’s always a game of comparison and there is so much to think through. Thanks again for the comment. I always appreciate your take on things.
1. Holy mackerel! I didn’t know appraisals could be so far apart!
2. I never heard of a “court” neighborhood before. It took me a while to understand it but I can see that it might have more traffic and be a bit less desirable.
3. Did the other appraiser have much experience in that area of town?
Thanks John.
1) Yes, they can. It’s very reasonable for there to be a minor difference because value is not so final so that we’d say something like, “This house is only worth $320,263”. We might instead say “It’s reasonable for this home to be valued between $315,000 to $322,000”. But when there is a big difference, we have to wonder what the problem is. It’s most likely someone got it wrong.
2) Well, I described this one “court” as a neighborhood. I don’t think people would use “court neighborhood”, but we do need to be familiar with the concept of a street that is isolated from the rest of the community. It’s easy to miss these types of details if we’re not careful.
3) I’m not sure what the deal was to be honest. There are many reasons why appraisals come in low. Sometimes it’s because of a lack of experience or a lack of knowledge about the way value works. There are also some appraisers who might be more prone to really high or really low values for whatever reason.