Was the appraisal wrong?

[Terry Russell]

Consider the following scenerio:

Mr. Homeowner has a home he wants to sell.
Mr Homeowner believes he can sell the home for 1.5x.
He decides to sell the property without a realtor.
He decides to have an appraisal done to use for advertising and marketing purposes.

The property is appraised at a value of 1.0x.

Mr Homeowner says "Oh, horseshoes, I can sell it for 1.5x.

And he does within 30 days.
(There was no market change or nondisclosure)

Was the appraisal wrong? And why?

Terry

 

[Anonymous]

Terry,

Was the buyer an educated buyer, knowledgeable about the area? Was there a specific reason the buyer wanted the property?

 

[Austin]

That is a very good question with a very good answer. The question an appraiser is asked under the existing definition of market value is: “What is the most probable price the property will bring.” What does most probable mean? It means if you used a statistically significant number of comparable sales, the resulting adjusted prices would form a bell curve and the most probable price is the price under the highest peak of the bell curve. It also means that half of the sales sold for more than this amount and the other half for less. If you do appraisals for mortgage loans and at least half of your appraisals don’t come up below the sale price, you may be “biased objectivity challenged.”
If I were not restricted by USPAP and I was hired to set the asking price by a client, I would use a number of competitive offerings tempered by market conditions, average days on market, and listing to sale ratios. When you take into consideration that the interest rate is making 4% shifts, what relevance does something that happened even two months ago have to do with what is going right now. The merry-go-round is moving to fast for the system and the system will never catch up. We are real estate appraisers and not soothsayers. Tell’um to call Mrs. Cleo.

 

[Dee Dee]

Terry,
The scenario that you just gave is not uncommon, particularly in an increasing market, and it's a constant challenge for appraisers to nail down a value when that is the case.
Perhaps the simplest way to explain it is that an appraiser estimates the value of a property based on past sales, whereas a seller/realtor bases their market value on what the market might possibly bear in the near future.
An appraiser does not have a crystal ball to determine what might happen a month from now, so there is little room for speculation. Once an appraiser states a value estimate on a property, they are literally taking it to the bank that the home will sell at that price. We are held accountable, could lose our license, our professional reputation or be sued if we are overpricing a home. A seller/realtor is not held to that standard.

 

[Terry Russell]

OK,

From what I gather then, due to possible, let's say even probable, fluctuations in the market, a common sense "buffer" is taken into the valuation equation.

I'll buy that.

Is the common sense factor commonly or occasionally or is it ever stated or explained in the report. If so, how is it worded?

Terry

 

[Austin]

atc: Price variation is not a fluctuation or buffer, it is a random variable and the definition of market value handles the terminology when it ask the question: "What is the most probable price." Most probable price means a probability function like a bell curve. It is understood that price is a random variable. Higher price properties have more price variance because they have greater variance in quality, style, and property features. Not possible to measure with conventional appraisal methods.

 

[Dee Dee]

OK,

From what I gather then, due to possible, let's say even probable, fluctuations in the market, a common sense "buffer" is taken into the valuation equation.

I'll buy that.

Is the common sense factor commonly or occasionally or is it ever stated or explained in the report. If so, how is it worded?

Terry

Terry,
You must consider that the lender wants to know that, regardless of fluctuations in the market, the most likely price that the home will sell for at the time of the appraisal report. Remember, the last thing they want is a home that defaults and can't sell for an amount that would cover the loan amount. It would be speculative to stretch at an estimated value that is too far above what proven sales already support. I'm wondering if when you say 'common sense factor' you mean speculation on future value based on recent past trends, or perhaps what current active listings might imply? From an appraiser's point of view, doing so would be gambling that the market will increase. If the market does the opposite, and the home can't sell for the estimate of value on the report, guess who will get blamed?
Typically when choosing comparable sales, the appraiser should do their best to find comparable sales in which the sale prices 'bracket' the final value estimate on the subject. In other words, find a comp which sold for more and one which sold for less. In some areas finding a comp that sold for more is difficult, if not completely impossible. If there are no sales of similar homes in the area which have sold for more than the estimated value of the subject, it will frequently throw out red flags to the lenders. Have you ever heard the theory that it's better to have the worst home in a good neighborhood than the best home in less desirable neighborhood? Lenders don't like financing a home that is the most expensive in it's area, or what could be percieved as an overimprovement for the neighborhood. Time and time again statistics have shown that the high end of the market is usually the most volitile and prone to large fluctuations, which I believe falls into line with what Austin is trying to explain. I think most appraisers would agree, it's a nightmare doing an appraisal on the most expensive home for miles around. I know I hate it. Almost without fail I spend twice as much time answering questions or scrambling for more information for the reviewer, and more times than not someone ends up unhappy.
Am I understanding your question correctly? Or have I gone off in the wrong direction here? :roll:

 

[Terry Russell]

I think I will step back and rethink this.

I was actually thinking that if an accurate appraisal was below the client's expectations, if there was a way to honestly "prop up" the value.
I know I am not making much sense. So I will be quiet now. Thanks, Terry

 

[Austin]

atc: Think of it this way: A given house that cost $100,000 with lot might sell for $100,000, or it might sell for $120,000, or it might sell for $150,000, or it could even sell for $200,000. Believe it or not, this happens sometimes for various reasons. These sales are called outliners. The question is: Which price in this range of sale prices is most probable to take place. If we take about ten similar sales and the range is $90,000 to $110,000, then the data is telling us that a bell curve is forming with a peak at around $100,000. If we could post graphs I could show you some very interesting things. If you pick 30 similar sales and adjust them all using least sum of squares and graph the results, most of the time you will find outliners well above and well below the trend line. That is why I don't use only three random comparable sales. You could pick three outliners and really be high or low. In upper income property you can really screw up. When I do an appraisal, I pick the 20 best comparables from my data base, do a graph with GLA vs sale price, and cull out the outliners. Then do the same after the sales have been equalized.
This is why the definition of market value specifically says, "most probable price" because that is the only way to describe a random range of prices.
PS: If an appraiser uses a statistically significant number of the most comparable sales, by definition, he/she is never wrong. If the answer is what the data indictes and that is the answer to the question, then how can the appraiser be wrong. Unless they got some wrong data.

 

[Pamela Crowley (Florida)]

Just another <$.02 opinion of how this could happen.

Seller didn't like the appraised value. Seller puts the house on the market by owner. Buyer comes along thinking a FSBO property is going to be a good buy because there won't be any Realtor fee and offers close to the asking price. Now, a loan officer gets involved with a pet appraiser that makes the contract price and the buyer thinks he's paying what it's worth because some appraiser said so. Seller never mentions the previous appraisal that was lower and laughs all the way to the bank.

This sale ends up sticking out like a sore thumb when looking at all of the sales in the area. This sale should NEVER be used as comparable because it's outside the 'probable' range and it doesn't meet the Definition of Market Value in that the buyer was apparently NOT well informed or well advised.

I really hate FSBO appraisals as too many fall into this category. I really, really hate the loan officers and their pet appraisers that let this happen.