There has been a long time ongoing discussion about whether appraisal is an art or a science. I think most people assume that it is a science, but is it? Think about what a residential appraiser does. He (or she) is asked to find the value of a home.
To begin to find the value, an appraiser will gather up samples of sales of homes that are similar to the “subject property”, nearby and selling within a recent time period. In this market appraisers are looking only at sales for the last six months. The sale must be a normal sale, without any undue pressure (like impending foreclosure). The records of recent sales are “science” with hard numbers. But then the appraiser takes the scientific data and applies a subjective view. He must evaluate quality of the design, functional obsolescence, desirability of the area, style, décor, and more intangible qualities that make one home sell for more than another. That is where it becomes an art. Just picking which of the homes are most similar, is an art. There may be 20 homes that sold within the last 6 months within ½ mile of the subject, the appraiser may only use 3-6 of them. How does he pick which is most similar? It is important to remember, that the appraiser does not get inside the homes he is using as comparisons. It is very subjective.
But actually we need to go back further for the real first step in establishing value. It is necessary first to figure out who is asking and why are they asking. Why, you ask? Well, first because the appraiser has a fiduciary duty to their client, i.e. the one who pays for the appraisal. That doesn’t seem to make much sense now in the year of the foreclosure, but that is how it works.
There are several reasons why this is true. Value is an elusive thing. There are a number of ways to look at the value of a home. How much will the home sell for today? How much will the home sell for, given 4-6 months of excellent marketing? How much will it cost to replace it if it burns to the ground? How much is it worth to an investor? How much is it worth to a bank if it forecloses? All of these are part of the definition of value and they all paint a different picture. So the client gets to tell the appraiser how and why they want a definition of value.
Imagine a situation where there is a divorce. It could be a husband who has to pay his ex-wife half of the value of the house. If the court orders the appraisal and wants fair market value, the value may be different than if the husband orders it, simply to strengthen his case. The husband could ask the appraiser to look for low value comps. If the wife ordered it she could ask the appraiser for the highest reasonable price.
I took a state certified course in the early 90’s and this is how the instructor put it. It was legal for the appraiser to look out for the interest of the one who hired him. I think the recent mortgage meltdown may change how the end result is supposed to be determined, but the fact that there are subjective choices the appraiser is required to make, means that the answer is, in my opinion not very scientific.
So its important to understand how the process works, so that when a seller offers a home that is priced drastically below appraised value, you actually are entitled to roll your eyes.
Dan Connolly
404-370-0050
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I always like reading articles about how agents view an appraisal. Since the course you took in the early 90’s many things have change in the appraisal world.
I would agree that it is both a science and art, but from my experience I see it primarily as a science. If the subject is in an area with 20 comps in today’s market that would be great. How do I pick the best ones? Similar age, size, style, condition, and amenities are top priority. Yes I typically haven’t set foot inside all the comparables. I have to rely on measurements from County records and other agents, then view all interior photos and read the comments to determine the condition. It is subjective, but by definition an appraisal is an “opinion of the value of real property.”
An appraiser’s fiduciary duty is NOT always to the person who pays for the appraisal. Often times it’s just the opposite. A homeowner or buyer will usually pay for an appraisal, either at the door or having it rolled into the closing costs. BUT our duty is to the lender who ordered the appraisal and is borrowing money to the homeowner.
People tell me all kinds of things during the appraisal inspection but 99.99% of the time their points aren’t relevant. “The neighbor’s house just sold for $750,000.” That may be, but the neighbor has a 4,000 sq.ft. 2 story on a lake and you have a 900 sq.ft. rambler next to a highway. It mostly goes in 1 ear and out the other.
You’re right – listing a home below appraised value means nothing in today’s market. Who was the appraiser and how valid was that prior appraisal?
Good read – I’d suggest taking an appraisal continuing ed class now to see all the differences. It keeps us on our toes!
Ben,
I appreciate your perspective. So you are saying that the appraiser doesn’t have a fiduciary obligation any more? In the example you gave I would think that the bank or mortgage company collects an application fee from the borrower and then uses some of it to order an appraisal, so technically the bank is paying for the appraisal and that would be why the fiduciary obligation goes that way.
How about when a private individual orders it, like in the divorce example, does the fact that the one who orders it dictate how the appraiser looks at value today?