Appraisers don't determine home value
Letter to the Editor
By Inman News, Thursday, September 3, 2009.Re: 'Blame the market, not appraisers' (Aug. 31)
Dear Editor:
I'm amazed recently at the perception of both the real estate buying public -- and sometimes other real estate professionals -- as to what they believe the purpose of a list price is, and what role they believe an appraisal company, hired by the bank, serves in the sale and purchase of a home. I also wonder if buyers and sellers, prior to selling or purchasing a home, are provided with information from their real estate professional as to basic real property valuation techniques so that they (the consumer) can formulate a smart and informed offer price or list price based on their own perception of value.
Real property valuation techniques haven't really changed over the years. When it comes to real property, there are five things that cause a home to sell and thus impact its value: Location, condition, market conditions, advertising and price. Out of these five elements, pricing is key. Most successful sales are a result of a property's list price being in proper alignment with the other four elements.
Is a home's list price reflective of its value? Absolutely not. A list price is only an offer from a seller to sell and is simply a "call to action" for all interested buyers to step forward and make a claim as to the property's worth. A home's true value is determined only by the worth, usefulness or utility to a purchase who may have a unique and special purpose for its use. This very simple sentence is essential in understanding value within the current real estate market and overcoming the current appraisal problems which are stifling sales from closing.
Does an appraiser determine a home's value? It's an interesting question in lieu of the current appraisal problems creating a burden for both real estate professionals and consumers. The answer to the question is no, an appraiser does not determine value. The purpose of an appraisal ordered by lenders is to provide an analysis as to whether or not the lender's funding decision is sound.
In a home purchase transaction, a lender will usually grant a loan to a buyer based on the loan-to-appraised-value ratio. A buyer may opt to modify the appraisal contingency paragraph in a purchase agreement, which eliminates the need for a property to appraise at the contractually agreed purchase price.
Let's consider the following scenario: A home is offered by the seller at a "call to action" price of $500,000. Due to current high demand for affordable properties, the fortunate seller receives multiple offers, some over list price. The seller selects the best offer with a purchase price of $515,000, but unfortunately the appraised value comes in at $5,000 below the agreed-upon purchase price.
Now the real question of subjective value comes into play. Just how valuable is this property to the buyer? As it turns out, the buyer is willing to pay the difference in cash between the purchase price and the amount which the lender agrees to loan. Why? Because this property's location is closer to the buyer's employment location and the buyer sees better value in offsetting the monetary difference for the house rather than paying for the rest of his career in employment commute expenses and time.
Who determines value? If you guessed a listing agent or an appraiser, or even a home valuation Web site, think again. Value is initiated by a buyer who wants to buy and a seller who desires to sell. A home's true value is determined only by the worth, usefulness or utility to a purchaser who may have a unique and special purpose for its use. The true value of a home isn't known until escrow closes.
Cindy L. Morgan
Broker
Huntington Beach, Calif.
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Submitted by Derek Eisenberg on September 4, 2009 - 3:33am.
When one buyer chooses to pay a certain price for a home, that is not the value of the home. Value is determined by the market. That one buyer might have personal needs that are not indicative of the market as a whole. For example a desirable location to one person is not a desirable location to the masses. Maybe that buyer works nearby but he owns the only commercial property (a gas station or convenience store) in an area where there is no other retail. So that location is close to work for that buyer but only that buyer. In fact Cindy's letter says just that ".....to a purchaser who may have a unique and special purpose for its use."
Cindy is right that the purpose of an appraisal is to determine whether the bank's lending policy is sound but it's also a check on whether the buyer's decision is justified by the marketplace and not a statistical outlier.
Anyone who has ever taken statistics in college knows that a sample size of one is not a sample at all. To say that value is what a buyer is willing to pay defies the laws of statistics. Value is what most buyers are willing to pay and value is what the typical buyer is willing to pay. However, just because some silly buyer overpays does indicate that the buyer's offer is the value of the home.
Derek Eisenberg
http://www.mls2u.com
Submitted by Jerzy (George) Szkup on September 4, 2009 - 11:13am.
George Szkup
www.DestinationTucson.biz
The article is correct in "academic sense". In real life house value is what a buyer wants to pay. However, in our organized business approach we need a uniform approach to obtaining $ figures for guidance and orientation purposes. Appraisal based on certain accepted method of analysis does deliver this number. And we - all of us - can now do what appears to be advantageous with this number.
George in Tucson
http://geoszk.posterous.com/
http://www.trulia.com/profile/httptruliacomprofilegeorgeszkup/
http://twitter.com/geoszk
Submitted by Anne and Eddie McKechnie on September 6, 2009 - 8:12am.
Kim your comment would be good if there was some type of uniformity as to how appraisals are currently done.
I recently had a home that was appraised three different times, two were close to the list price, but the first was off by $30,000.....and was a bad appraisal..... there were comps used from 4 miles away when there were recent sales in the subdivision.
Unfortunately the inadequacy and unwillingness of the appraiser to add comps that were requested by the bank or to consider upgrades, lot, cost the seller another independant appraisal, and my client to change banks to see if she could get a different number. This seems to be an ongoing experience here.
It is like tossing a coin to see if you get an appraiser that even lives in Tucson to appraise your home.
Submitted by Douglas Quenzer on September 6, 2009 - 8:16pm.
There are many definitions of value. Market value is determined by what a TYPICAL buyer will pay. Cindy described what an atypical buyer would pay because they are unduly influenced by a unique and special purpose. An example would be a farmer that buys the 40 acres next to his farm. They are going to be atypically motivated. As an appraiser if I know that a buyer is atypcially motivated I DO NOT use that as a comparable. There have been numerous times when I have found a sale that just seems really high for the location and compared to other sales. I generally call and ask, "Why did this buyer pay so much?" If I get a hint that there was a "special purpose for its use", it is immediately excluded from consideration.
You are right in that appraisers do not determine market value. The market determines value. But one comparable sale doesn't determine a market. That is why when we appraise a property we use at least 3 arms length sales AND 2 or 3 pendings or listings. The listings are used as a check on current market conditions based upon the principle of substitution. We then reconcile those as to which is most similar to the subject.
Also it is VERY typical for appraisers to have a different opinions of value. Typically if an appraiser is within 5% +/- of another appraiser's value we call that well within an acceptable range. So let's say one appraiser gives a value of 500,000 and another 525,000. That is an acceptable range. Especially if the comparables have significant differences. I do many reviews, and there are times that I may not agree with a value of a previous appraisal, but the value given is within 5% of what I might give it. The other appraiser is not wrong, and I am not right. It's a difference of opinion. Real estate appraising tries to be as analytical as possible, but there are times it gets down to differing perspectives or a different opinion. In the example Cindy gave an appraiser val;ued it $5,000 from a sale price of $515,000. Unless the comparables were so tight that the $5,000 was impossible to justify, I as an appraiser would certainly not be very stuck on $510,000. No one is that good!
Submitted by Marcie Geffner on September 10, 2009 - 8:48am.
The typical buyer argument makes good sense because if the buyer who pays more due to a special circumstance such as nearby employment is to be considered in an assessment of market value, then the seller who accepts less due to a special circumstance such as an estate sale or bank-owned foreclosure would also have to be considered in the assessment of market value. It's just not reasonable to include outliers at the high end, but exclude outliers at the low end, unless your aim is to ignore or artificially inflate the market price.
Marcie Geffner
www.marciegeffner.blogspot.com
Submitted by Cindy Morgan on September 13, 2009 - 10:34am.
Buyers and Sellers themselves determine the value, and yet it seems like a backward process -- and perhaps one that allows too much pricing control left in the hands of a financial institution -- when the appraisers determine value during the escrow process.
In our current home purchase transaction process, bank's appraisers are for a bank's use only in providing an analysis as to whether a bank's funding decision is sound. It seems to me this process should be applied at the front end of a listing whereby a financial institution will agree to the highest amount it would loan for the property, based on past comparables of sold properties and those in escrow. After that, the property is put on the open market for real estate consumers to make a subjective claim in how much beyond the loan value the consumer would be willing to pay.