Appraisal scales of justice picture

When I initially got my real estate license, I took the course that was required at the time to become an appraiser. The first thing the instructor said on the first day was that Appraisal is an art, not a science.  I think most people assume that it is a science, but it really isn't.

Here is why. To begin with the appraiser has a fiduciary duty to the person or company that hires him. So in a divorce the husband and wife can each hire separate appraisers. Whichever party might have to pay the other party for 50% of the value of the house will want a low appraisal. Whoever receives the money will want a higher value.It is actually legal for each appraiser to look for either the lowest value or highest. A court ordered appraisal will probably ask for fair market value. Banks frequently ask for the appraiser to look for the sale price because if the appraiser comes back with a value 20% higher than the sales price, then the buyer would have a case for no PMI. 

Here is another way to understand the ART aspect of the appraisal. 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 comparable 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.

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, with 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 to define value. So even while the appraiser might be looking for the highest reasonable price, the fact that there are subjective choices the appraiser is required to make, means that the answer is not very scientific. It's important to understand how the process works, so that when you see a home described as being "below appraised value", you actually are entitled to roll your eyes.


Dan Connolly