An Appraiser Bites Back!
July 1, 2008
I’ve never met Jennifer Allan, but I like Jennifer Allan. I like her website. She left me some constructive, well thought-out comments on a recent post of mine, which I really appreciated. I like her writing. I’m looking forward to reading her book, “Sell With Soul.” But I couldn’t disagree more with some of the things she said on yesterday’s Real Estate Radio USA show. 
Jennifer was on yesterday’s show to discuss the seemingly age-old question of how listing agents justify their fees. Anyone who listens on a quasi-regular basis knows that Barry and Barry flat out feel that it is nearly impossible for 99% of listing agents to justify their fee for the services they provide. (That’s another topic all together and I feel strongly that Jennifer and I are both part of the 1% who can justify their fees as listing agents.) I enjoyed her last interview a lot and looked forward to her take on this one. She speaks with authority, knows her stuff and I was anticipating a spirited debate.
The conversation eventually turned to pricing properties and appraisers and then the fangs came out. To be honest, I wasn’t prepared at all for what I was about to hear. It was appraiser hate-speak! I’m sure Jennifer would tell us that “some of her very best friends are appraisers” but I certainly wasn’t feeling the love yesterday afternoon.
Jennifer claims that appraisers can or do not factor in things like “appeal, smells and the ugly house next door.” I wholeheartedly disagree. I firmly believe that the majority of real estate markets are basically efficient and self-correcting. I contend that THE MARKET automatically factors in all these things (and more) and the crappy-looking, smelly, poorly-located homes all sell for less and the sales prices reflect these inferior conditions.
These sales prices (not listing prices!) represent the current market. And appraisers base their “opinions of value” on hard current market data and validated statistics. By nature, sales prices are reflective of all the factors of a home. Folks who pay $124,450 for a home, pay that because it’s soaked in cat pee, next to the local crack house and has a dilapidated front porch (Can I interest you in that one, Barry?).
Appraisers base their opinions of value (you’re going to hear that phrase a lot in this post) on sale prices of recent, proximate, similar homes. The market factors in all aspects of a home and appraisers form their opinions from the market data. If A=B and B=C, then A=C. (And they told me I’d never use that funny math in the “real” world! Ha!)
She also said, “The appraised price is irrelevant to the market value of a home.” Huh? We had a gorgeous listing from our office that went under agreement for close to $1 million dollars earlier this month. The appraisal came back somewhere in the mid $800K’s. Ouch.
Without a significantly higher downpayment, the bank said “no way” on the financing. I didn’t see the appraisal myself, but I heard it was done by an out of town appraiser who may have overlooked some relevant comps for this very unique property. Safe to say, this was a tricky one and by no means a “cookie cutter” appraisal.
The buyer could have picked his jaw off the floor, applied with another lender, gone through the appraisal process again and maybe get financed elsewhere with a different appraisal. But what did he do? He ran scared, thankful that he didn’t just do something dumb. Who set the market value there? The listing agent or the appraiser?
Jennifer went on to say, “An appraisal is a justification of the sales price.” Huh? No, it isn’t. An appraisal is an unbiased opinion of value and it is based on hard market data, ie: recent, proximate, similar closed sales. Jennifer’s comment implies that the appraiser’s job is merely to follow along on a leash and politely write up a fancy report with pretty pictures, drawings and maps that “supports the sales price.”
Isn’t that thinking a HUGE part of the reason we are in the mess we are in today? Because shady appraisers simply “justified sales prices” with appraisal reports that weren’t based on hard market data, overlooked reality and weren’t worth the paper they were written on?
Sure, there are still “form fillers” out there who will just “make it come in at the sales price” but I believe the vast majority of my appraiser colleagues take pride in their work and consistently strive to provide their client (who is the lender BTW, not the buyer!) the most accurate opinion of value possible…regardless of the sales price.
“I don’t think appraisers have any business pricing homes for market.” On the complete contrary, appraisers are reflecting the market. When I’m on a listing appointment, I tell my sellers we will start with a typical CMA which will explore closed, pending and active properties to come up with a price range we feel is in line with the current market.
I then take it one step further, remind them that chances are your buyer will be applying for financing, and perform a full-blown Fannie Mae Form 1004 because that is ultimately how a bank will formulate their opinion on whether they will lend this buyer money to purchase this home. This often includes things like regression analysis and declining market status.
This appraisal often provides insight that helps us more accurately price the home. I look at is as skipping a step and starting with the finish line in mind, rather than having to sell the property twice: once to the buyer and then once again to the appraiser and the bank.
Yes, I agree with Jennifer that both pricing and appraising homes involves a certain level of “gut”. It’s not an exact science. Market values are fluid and constantly evolving. We both try to look at the facts and estimate a property’s most likely current market value as of the time of inspection (I use that language a lot in my appraisal reports). The big difference? An appraiser is a disinterested third party whose fee for service is not tied to the eventual sales price (and unfortunately, around these parts, it’s not close to the $375 mentioned in the interview either!).
I also agree with Jennifer that market value is truly defined as what a ready, willing and able buyer is willing to pay for a property and what a seller is willing to accept. But where we seem to disagree is that I contend an appraiser’s job is to analyze what buyers and sellers have recently decided to offer and accept for similar, proximate properties. Then, make some justifiable adjustments for differences derived from market data (ie: How much more did a very similar home with a 2-car garage just sell for vs. no garage? There’s the market value of a 2-car garage.) and eventually come up with an opinion of value.
If we were dealing with a fictitious, cash-only market, yes, the appraisal process would be irrelevant. But then again, market value itself would be irrelevant! “You like it Mrs. Money Bags? You got some serious cash to blow? Exactly how much are you ready to blow?” Great for sellers with a property that tickles the fancy of Mr. and Mrs. Money Bags, but no way indicative of any kind of “market” value.
But we’re not in a cash-only market. Most all buyers obtain financing. Lenders lend money based on current market values and count on the unbiased opinion of a professional appraiser to determine a property’s most likely current market value. If real estate agents determined market value, all houses would sell at or above the listing price, right? I know around here lately, very FEW homes sell at or above listing price. Maybe it’s different in the Mile High City…
Two recent, real-world examples of how appraisals reflect market value:
(1) I sold a local condo in 21 days last month because the appraisal I did pre-listing helped price the home correctly. Average days on market in that complex is well over 100 days and, yes, my sale lowered the bar pissing off the 8-10 other active listings. Sorry neighbors, the MARKET told me as an appraiser that a lower price was more accurate. And I was right.
(2) I saved my buyers almost $30,000 last month because I did an appraisal and presented it with our offer so I could show this FSBO that, yes, you have a lovely home but based on the current market data, your list price is about $30,000 too high. And I was right.
Like I said, I’ve never met her, but I like Jennifer Allan. I like her writing, her soulful selling style and her sharp wit that comes through online. But I vehemently disagree with her opinions on an appraiser’s ability (or inability in her words) to price a home and determine market value.
I’m standing up for appraisers everywhere and shouting, “We are the mirror to the market! We don’t make the market, but we report it as it is! We will NOT be belittled!”
Appraisers may sometimes be a geeky, analytical, often-lacking-sales-and-social-skills group of heathens, but I warn you: DO NOT MESS! When cornered they will bite, and their venom can be lethal. Especially the kind that kills your overpriced deals.
About the Author:
Mike Lefebvre, The "Uncommon Agent", is a Massachusetts licensed real estate agent with Hallmark Sotheby's International Realty in Hopkinton, MA. In addition, he is also a certified residential real estate appraiser and the owner/chief appraiser at MeetingHouse Appraisals. Mike wields a double-edged sword, combining his appraisal expertise with his sales and marketing prowess to maximize benefits and profits for both his buyer and seller clients.
A self-admitted marketing junkie, Mike loves exploring all things Web 2.0 and brings a refreshingly unique approach to real estate marketing. Last but not least, Mike is also a proud card-carrying member of Red Sox Nation.
Contact him at 617-828-4127 or 508-359-1465. You can reach Mike on the web at The "Uncommon Agent"
You can also email Mike at mike@theuncommonagent.com
Mike this is a well written, fact based article that gives us insight on the determination of value from the your unique perspective as an appraiser AND a Realtor.
I love that you mention regression analysis. We have been telling agents about this for over a year and most don’t want to hear it and then are surprised that their deals don’t close.
I did a valuation for a client last night and what the value SEEMED to be wasn’t what it really was. ALL..every single home in his area is declining and 5 were on the market unsold in excess of 200 days on market and priced $50,000 or more below his.
The closed sales in the last 6 months paint a bad picture of value. Without going further and looking at the regression analysis and the supression of value asinfluenced by the above referenced properties the agent was way off.
Show me agents who know how to include this in pricing and valuation and that’s the agent we want to work with!
I look forward to reading Jennifer’s response.
Oooooohhhh… thank you for the opportunity!!
First, I am not bashing appraisers. I wasn’t prepared for this line of questioning, so I just started rattling off my opinions. However, I stand by the opinion that an appraiser is not the best person to price a house for market. That is not what they do. That’s what I do. I price homes for market. And I do it well.
I work with buyers. I preview homes like a madwoman. When a house in my neighborhood sells, I PROBABLY SAW THE INSIDE OF IT while it was an active listing. I smelled the inside of it; I know how much trouble I had showing it. These factors affect what the house will sell for. I specialize in certain markets and I know them well. I don’t need to ask for directions to my listing presentation.
I have a house in Alabama that just appraised for $186,000. Six months ago, it appraised for $235,000. In a stable market - that is - the values haven’t changed much, if at all. Why the discrepancy? Because Appraiser #1 counted my professionally constructed sunroom in the square footage; Appraiser #2 did not because it didn’t have a heating vent. Fair enough. A1 also deducted $2k because one of the a/c units wasn’t working at the time of the inspection (it needed frion, hardly a $2k item).
Had this been my listing, I would have advised my seller to install a flippin’ heat duct or electric heat so that the square footage would not be in question. This is not an appraiser’s job; he just calls ‘em as he sees ‘em. But as a real estate agent who prices homes FOR MARKET all day long, I would certainly not have deducted nearly $50,000 due to an easily-installed heat duct.
So… what is the Market Value of the home? $235,000? $186,000?
I think appraisers have their place in a real estate transaction, as do I. We have different roles. When appraisers start previewing homes and working with buyers and specializing in certain market areas, then maybe I’ll feel a little threatened that they can take my place.
Of note, I feel similarly toward exclusive listing agents (sorry, I’m sure I’m fixin’ to offend even more people). If you don’t work with buyers on a regular basis, you don’t know how they think. Who is going to buy your listing? A BUYER. And I believe as listing agents we need to understand that person.
When a listing sells at a certain price, I know WHY it sold at that price. And it’s not the number of bedrooms and bathrooms and square footage. Objective parameters figure in, but are not the reason one house sells over another. Therefore, the less tangible, the less objective factors ARE very important and appraisers aren’t able to factor those in.
Love y’all.
I just love that you said “fixin’ to offend”….that’s got to be a post title soon!
Keep up the inspired writing.
: )
Mike
Ok, I’ve spent half of my evening chasing this debate around the blogosphere. Mike you make several valid points above, but I question your 2 real world examples. In neither case were you a disinterested third party. Therefore it seems as though you are acting more as an agent than an appraiser. Even if you disagree, do you really believe that a competent agent would not have reached the same conclusions?
Mike –
I just wanted to let you know that I’ve re-blogged a portion of your an Appraiser Bites Back! Post on http://www.AppraisalScoop.com
http://appraisalnewsonline.typepad.com/appraisal_news_for_real_e/2008/07/an-appraiser-bi.html
Thanks for trying to correct many of the typical misconceptions of what appraisers do!
Some other common misconceptions that were not hit on:
• Appraisers only appraise for lenders!
• There’s only one definition of “Market Value”
• Appraisers do not interact with market participants
Appraisers have a wide variety of clients that use their objective and analytical talents: They provide expert testimony to courts and estates, they work for relocation companies, they appeal tax assessments, they provide pre-listing and destination valuation services. All of these have no “sales price” to “justify”.
Depending on the client and scope of work, there can be many types of value – current and retrospective market value, anticipated sales price, short or “quick” sale, ad valorem (assessment), etc. etc. In this case (interview) what can happen is trying to compare a “pre-listing” assignment with a “lending assignment”. Those can, and often do, have very different scopes of work. Lending assignments often come with very tight “underwriting” requirements that appraisers must follow. They are NOT “anticipated sales price” assignments that most sales agents are working with when setting a listing price on a home.
It’s crazy to think that appraisers do not interact with the market participants. Sometimes we’re talking with the seller, sometimes the buyer, and sometimes we get to talk with ALL of the participants of the transaction (including the agents). Especially when I’m doing pre-listing or relocation work, I want to interview the parties to find out what their “motivations” are.
Brian J. Davis, RAA
Brian J. Davis & Associates
http://www.OurAppraisal.com
Brian - seems like as good a time as any to ask… you say that appraisers DO interact with the market participants, but in the last two appraisals that I’ve had on my Alabama properties, the appraisers refused to talk with me about their findings, saying that they could lose their licenses. I paid for the appraisal; why can’t they talk to me? Sorry, I know this is off-topic…
Now I’ll hit your links.
Great article Mike - I’ll completely back you up on it. There are so many misconceptions about what an appraiser does it’s good to have a discussion like this.
Jennifer - reading your comment it appears that the appraisals were done on homes you own. If you were refinancing or even purchasing a home, even though you paid for the appraisal YOU are not the client - the lender is. Now I don’t claim to know the laws in Alabama, so just talking to you about what they found may or may not result in them having their licenses revoked. If 2 different appraisers at 2 different companies told you that, I would tend to believe them.
If you haven’t seen Mike’s prior article on what your house IS NOT worth, it’s a great read so check it out:
http://www.realestateradiousa.com/blog/2008/05/24/what-your-house-is-not-worth/
Appraisers are human beings just like Realtors, mortgage brokers, inspectors, etc. In all these professions you have individuals who are great at what they do and uphold the highest standards. But you also have the ’skippy’ as they’re often referred to in the appraisal world, who just got into the business because their best friend’s sister’s boyfriend’s brother’s girlfriend heard from this guy who knows this kid who’s going with the girl who made a lot of money as an appraiser. (hope you all enjoyed the Ferris Bueller quote). Try not to let the bad ones ruin your perception of this industry.
Kudos to Brian for the post on http://www.appraisalscoop.com. I read his articles daily as do many GOOD appraisers across the country.
[...] estate agent and certified residential real estate appraiser recently reviewed a very controversial Real Estate Radio USA interview with Realtor Jennifer [...]
Jennifer - As you know, appraisers must adhere to the Uniform Standards of Professional Appraisal Practice (USPAP) just as Realtors must adhere to their ethical standards.
Appraisers owe a duty of confidentiality to their “Clients” or “Intended Users” regardless of who paid for the appraisal. For most lending assignments the “Bank” will be the client as intended use of the appraisal is for the purpose of underwriting the risk on their loan.
NOW! If YOU were the “name client”. . .they most certainly CAN and SHOULD discuss all aspects of their conclusions and how they arrived at them.
Paying for the appraisal does NOT automatically make one an “Intended User” or client of the appraiser. If your appraisals were orded by a lender . . .in most cases . . .they are the client. http://www.ourappraisal.com/AppraiserEthics
All that said . . .you are entitled to receive a copy of the appraisal at closing (or when requested in writing) from the lender. There is some legislation currently being considered that would require a copy of the appraisal be provided to the buyer BEFORE the closing. I personally think that’s an excellent idea!
Brian J. Davis
http://www.OurAppraisal.com
Very good article Mike. I’m sure many GOOD appraisers appreciate your clarification, and Brian’s, of what we do, how we do it, and WHY we are REQUIRED to do it that way.
Jennifer claimed she was not bashing appraisers, but it was quite apparent that was the intent since she was given the oportunity. Being unprepared for that line of questioning, the PROFESSIONAL and ETHICAL response should have been to simply state - her lack of knowledge, expierence, training, and no State issued License to do appraisals prevents her from commenting on the appraisal process - since her comments made that quite apparent.
Unfortunately, her “rattling opinions” - as she put it - are echoed from the mouths of many agents across the country on several different networking sites. All with the same misconceptions, and are only expressed to prevent (or when) lost or reduced commissions that are at stake.
I’m not bashing Realtors or Agents, but sales people are sales people regardless of the product. And over past centuries to current times, the vast majority are always looking for that next “sucker born every minute” to make a sale any way they can.
Jennifer,
Tagging on to Brian Davis’s comment-
I think you are confusing WHICH market participants we speak to.
As an appraiser, the conclusions in my report regarding the SUBJECT property are confidential to my client (i.e. a lender in many cases).
But when I am trying to find out about the sales price of a COMPARABLE sale I most certainly speak with the market participants. I call the buyer, I call the seller, the listing agent and the selling agent if there is a discrepancy. In Kansas each sale is filed with a validation questionairre at the courthouse (available only to real estate agents and appraisers) with contact info for the buyers and sellers. As an appraiser it is my DUTY to find out the exact same facts as you, the real estate agent, do when pricing a home. Simply because some appraisers fail to do what they are suppose to does not mean the appraisal process is in of itself less qualified to deal with pricing a home.
Let’s say I’m a property owner and I am ready to sell. Do I want to get a listing price from someone who a) has a vested interest in selling my home, and thus may tell me a higher than reasonable price simply to get me to sign a listing agreement? (and will later brow beat me into a lower, more reasonable price with a variety of excuses) or b) someone with no vested interest in whether I sell my home or not - his only interest is whether the value is accurate.
So, while you may have toured a home when it was an active listing - an appraiser in that area may have also seen that home’s interior because he appraised it. In the small towns were I work quite frequently I have also appraised the homes I am now using as comparables. I am certain that I know as much (or more) in some cases than the average real estate agent in that town about those homes.
Lastly, I spend my day analyzing property values - that’s all I do. Analzying property values is a “side” job for a typical real estate agent- their primary function is to SELL houses.
You ask in your example which is the “market value” of the home. Neither. Those are both OPINIONS of market value provided by 2 human beings. A lender has to decide which one is the better SUPPORTED opinion. If the one appraiser did not take into account the market REACTION to a functional cost to cure (heat vent) then his value opinion may be his opinion, but that does not mean it is SUPPORTABLE or ACCURATE. That’s why we have state appraisal boards and licensing - otherwise we could simply write down whatever number we wanted, call it our opinion and no one could question it.
You are citing appraisers doing things the wrong way as an indictment of the appraisal PROCESS. That’s like me saying no one should hire a real estate agent and agents are not a person to use to sell a home because they can steal your money (because somewhere in this county there are a handful that have somehow done this).
I personally have many real estate agents that hire me to price homes for them. Not because they are not capable of producing a CMA- but because my appraisal gives them leverage to properly price a home when they are dealing with an unrealistic seller who may be too proud (or not proud enough) of their home. It’s also used as a sales tool for potential buyers. If you are negotiating a sales price with a buyer - would you rather have an unbiased, third party appraisal to show that buyer, or you the listing agent just saying “that’s what we think it is worth”?? That $300 appraisal could save you a couple of thousand in negotiated sales price.
Just my $0.02.
-Michael Elliott
Great points, guy. I still proclaim that I am not appraiser-bashing; simply pointing out the differences in what we bring to the table during a real estate transaction. Kiss kiss.
Jennifer,
It is so true that how we see ourselves and how others see us is two different things altogether. During 16 years of appraising real estate, I have often heard the same (disdainful) comments from other Realtors concerning appraisers.
The responsibilities of being a Realtor or an Appraiser are very different. In most cases, one is not an expert in the other. Let’s face it, at times even the most capable professionals are bound to disagree at some point (especially where money is involved).
Moreover, we tend to judge each other’s role by how we see the least capable participants behave. Deal with one bad appraiser (and unfortunately there are too many of these) then all appraisers become inapt.
I believe the biggest misconception is that appraisals are a one size fits all. There are several different definitions of value that an appraiser can solve. No an “As Is” appraisal with the standard market value definition should not be used or considered for a listing, however an appraisal with an Anticipated Sales Price for the value conclusion is very different than what most would call a mortgage appraisal. Some appraisers could not even tell you the difference if they have only appraised in the little box of mortgage type appraisals.
I do anticipated list price appraisals and my current batting average is better than most agents. I love doing these type of appraisals which include ERC Relocation Appraisals because I can watch and see just how close the property sells for to the suggested sales price and most times I am within five percent which is real good for predicting the future with historic data.
When an appraisal is completed for the anticipated sale price of a home I do advise the home owner to contact Realtor for advise and interview no less than three if interested in listing with an agent and to use the appraisal as a tool.
I’d like to arm you with some information that may help you determine the proper value point between the $50,000 variance in your sunroom issue. It may also help with your future sellers. If you are already well aware of this information, then forgive my redundancy.
There are several things an appraiser considers when they are faced with the ‘living area or not’ sunroom. First of all, the sunroom needs to be finished at the same quality level as the remainder of the dwelling. I’ve seen enclosed porches that have 3″ thick pony walls, plexiglass singlepane windows, indoor/outdoor carpet, and you can still see the brick or stucco on the back wall of the house. You access the room from a sliding glass door which is still in place, and the window to the kitchen along the other end of the wall is still in place. The exterior door from the sunroom to the outside is a storm/screen door. Run a heating vent to this room if you like, but it is not anywhere near the quality level as the rest of the home. Second, has this become an integral part of the floorplan? Does it flow into the dining/living area you just walked out of? Hardly. It’s a sunroom all day long. Great for plants and relaxation, weather permitting, but I can’t very well move my couch or nook table into it and use it year round.
Then there is the other end of the spectrum where the walls are 2 X 6 construction, (or 2 X 4, as long as either is insulated) double pane windows, fully finished interior walls, and the space actually ‘becomes’ part of the dwelling. I can take the old back door and windows out and not be concerned about my heat bill suffering. The exterior has been finished with a weatherproof, standard exterior finish - stucco/brick/siding, whatever. It flows with the adjoining room. There, you have additional living area.
Perhaps you can look at it in another way. If I paid a contractor to add on an addition to my home, would I consider this a job well done, or that he cut corners?
Hope this helps!
Another Realtor/Appraiser Hybrid
Mike, I know I should just let this one lie, but I just can’t. Oh well.
I just returned from meeting an appraiser at my listing. It’s in one of the trendiest neighborhoods in Denver and it has been trendy since 1996. Recently it was written up as being the 2nd fastest appreciating zip code in the city. I live here, too and yeah, it’s very desirable.
However, 14 years ago, it was not quite so trendy and some old-timers still remember those days.
So anyway, the appraiser made the comment: “Well, I don’t do a lot of work in this neighborhood, but it seems to be finally starting to turn around.”
Uh, well, yeah, it turned around, like, ten years ago.
So, while I’m not saying that he can’t come up with an accurate appraisal, I do say that because appraisers don’t “specialize” in any particular areas (or even metropolitan areas - he says he does a lot of mountain work), they aren’t the best people to properly price a home for market.
Whenever I venture into a neighborhood I haven’t been in before, or even recently, I spend a lot of time (re)educating myself on the nuances of the area so that I UNDERSTAND WHY the sales figures are what they are. Not just that they ARE.
Does this make sense?
Sounds like Grizzly Adams has come down from the mountains again and given us appraisers all a bad rap! He does that every 10 years apparently! That guy would not be a good appraiser to price a listing in your neighborhood for market.
But based on the “hotness” of this neighborhood, and its recent positive press, I bet when he performs his neighborhood analysis he will find lots of recent, proximate, relevant data that supports everything you’re saying about the area.
Plus, most appraisers talk to much on the inspection as well. Do your inspection, ask the questions you need answered and shut up! Leave your market reports to yourself please. If I take that statement a couple steps further, I could say most people talk too much most of the time. Two ears, one mouth, to me means talk for 5 seconds and listen for 10 (or more).
I understand what you’re saying Jennifer (I think I did from way back when the interview was on…how long ago was that???), and it does make sense. Grizzly Adams should not be pricing trendy urban homes for market. But as long as he uses the most recent, relevant market data from the immediate neighborhood, I think he will have just as much insight as Loretta Lexus, who may be factoring in her next car payment as much as the current market data when she sets a listing price.
I’m no Grizzly (could have shaved better today, though) and you’re no Loretta. But I do contend that GOOD appraisers go deeper than the MLS to do their research in formulating their “opinions of value.” I’m assuming you’ve never (or rarely) got a call from a random appraiser who was looking at one of your recent sales as a comp and had some questions for you? I do that ALL THE TIME. Some sales prices make perfect sense and some demand a little more explanation. I always call the listing agent and the selling agent to try and get the scoop. Maybe that’s not common.
PS- LOVE the conversation we’ve stirred, don’t you?
Erik,
Thanks for the comment. Been meaning to reply…and today was my first opportunity.
In the case where I showed my seller what an appraisal of his condo might look like before we listed, he could see that although there were 8-10 other units in the complex listed HIGHER than his, when it came time for the bank to lend the money to his potential buyer, none of those list prices were going to appraise. The appraisal is just another way for me to communicate my opinion of value from the eyes of the bank who will be lending the money. Another Realtor might not be able to articulate as well why a lower listing price than all the immediate competition makes sense. I use the appraisal to not make me the bad guy, but instead make the “market” the bad guy!
In the second case where we bought a FSBO listed home, without another agent involved on the listing side, I assumed there may have been less due diligence performed in calculating a list price. Again I used the appraisal to show the owners/sellers that, “Yes, your home is beautiful and you’ve put a ton of work into renovating it, but my buyers needs to borrow money and based on the best comps available AND the recently tightened lending standards, I’m fairly confident that they will not lend on a value much higher than this. ” If this was a home listed with an agent, perhaps the list price might have been more reflective of true market value.
The appraisal is just one vehicle of expressing my opinion of value. I am ethically forbidden to perform appraisals for lending purposes on properties that I have an interest in. That’s an obvious conflict of interest. I’ve turned down several appraisal assignments that involved agents from my office. I feel I’m too close to those deals as well. But if I’m just using the appraisal process to communicate to my clients what my opinion of value is, and more importantly what the bank’s potential opinion of value may be, I think I am serving the best interests of my clients.
If the listing price is right on the money (pun intended), there’s no need to submit an appraisal with the offer because our offer is going to be pretty damn close to the list price. If I’m listing a short sale, doing an appraisal is often meaningless. The sellers just need to get the hell out of the situation ASAP and the home probably won’t be selling for market value anyways. So sometimes it makes sense, and sometimes it doesn’t.
The way I look at it is, over the course of my career I’ve personally performed over 1,500 appraisals in the area and have learned a thing or two about property valuation along the way. I feel I owe it to my clients to put this experience to work for them. If we can look at the price from yet another angle, the one from the underwriter who is going to eventually OK the financing on this transaction, we be crazy not to explore that as well, agreed?
Thanks again for your comment. Have an AWESOME weekend! Mine is just about to start…..
All My Best,
Mike
“Sounds like Grizzly Adams has come down from the mountains again and given us appraisers all a bad rap! He does that every 10 years apparently! That guy would not be a good appraiser to price a listing in your neighborhood for market.”
I don’t agree. He is as good as his ability to research and analyse the data and market. He probably hasn’t done any of that research yet because before seeing the house he doesn’t know what he is dealing with.
And even if he DID know that market inside and out, he would still DO that research so he has up-to -date details to base his findings on, instead of using that silly, canned, phrase “based on Appraiser’s experience”.
Mike - I agree with what you said. That particular appraiser most likely should not be doing appraisals in that market area. Unfortunately there are many appraisers that fit in the same catagory (incompetent) as do many Realtors/Agents.
A good appraiser that is doing the proper type and amount of research can go into any market area and determine an accurate value, even if they don’t “specialize” in that particular area (or metropolitan area). One of the objectives for an “unbiased opinion” is the ability of an appraiser to go into a market area with an open mind and due diligence as a prudent buyer would. The difference being a prudent buyer (and agent) are not educated, trained, or qualified to determine value, (agents determine estimated sale price) nor are they willing or capable of complying with the regulations governing the appraisal process.
As David Dietz stated - I too do anticipated list price appraisals, pre-listing and relocation appraisals. While it is true, no one can predict the future, (not even a Realtor, regardless of how conceited they may be) a realistic price or range can be acheived if done properly without the influence of desired results (listing contract) or desired commissions.
It is common, or should be for all appraisers, to call the listing or selling agent with questions. I will even contact the seller or buyer in some cases (depending on the response or lack of from agents). My expierence with doing so has a 50/50 mixed result. Some agents are helpful and some are aren’t.
[...] respectful. I was accused (politely) of Appraiser-Bashing and Appraiser-Hate-Speaking. You can read more about it here, including my rebuttal. Again, all very polite – a nice change from some of the Realtor forums I [...]
[...] The Uncommon Agent Everything Real Estate in Norfolk, MA and the Surrounding Areas « Coffee with a Keynote Can of worms has officially been opened… July 3, 2008 I’m enjoying the friendly debate surrounding my reply post to the one-and-only Jennifer Allan earier this week. Half the fun is in the comments. Appraisers? Realtors? Who is the best group to determine the market value of a home? Join the fun here… [...]
To clarify, I don’t have a problem with an out-of-area appraiser appraising my listing. I’m sure he’ll get the job done and we’ll all move on happily. I just don’t think he would have been the proper person to advise a seller on how to price her home for market.
Honestly, if you were going to list your home and wanted to price it right, would you want help from someone who actually markets (and sells) homes for a living or someone who does not? ASSUMING (and I realize this might be a big assumption) that the Realtor pricing the home is competent, knowledgeable and has your best interests at heart.
On the flip side, if I were going to LOAN my money to someone to buy a house, I’d certainly want an appraisal instead of a Realtor opinion of value (or maybe both). We just do different things - I don’t take your place and you don’t take mine. We work together toward the goal of getting all parties what they want! (buyer wants to buy, seller wants to sell, mortgage broker wants to lend money, bank wants to protect their money, Realtor wants to go to closing with a happy customer)
Let me start by saying “in my opinion”.
In my opinion “Grizzly Adams” the appraiser comes down more often than any appraiser would like to admit. What may be lacking in the comparable approach is due diligence.
If a property sold and closed 3 days ago (deed not yet recorded) it isn’t likely to be considered unless the agent or someone involved is diligent enough to
1-be aware of that closing
2-be familiar with that property
3-be able to aquire a copy of the HUD1
An appraiser won’t do that (in my opinion) however a good listing or selling agent will. Local market knowledge is key to establishing any credible comparable approach justification. In my opinion, the comparable sales approach is the most subjective of any appraisal and the least reliable.
If a residential dwelling is purchased by an investor shouldn’t the investor be entitled to an income capitilization approach. In fact doesn’t the USPAP require that appraisers attempt to use all 3 approaches to estimate value if enough market data is available?
The comparable approach is subjective. In and of itself it’s subject to “similar properties”. As previously indicated it’s can be subject to lots of things like the appraiser, county recording, and even anticipated decling markets.
Would an appraiser aniticipate appreciable value in a sales comparison approach given very different market conditions?
Jennifer,
It’s because (and if this is not you, again, forgive me) I’ve seen too many Realtors continue to get stuck on price per square foot for instance. If all homes are equivalent in age, lot size, parking facilities, baths, condition, etc., price per square foot might work. ie. in new construction by a tract builder. If these factors aren’t all equal, it’s similar to comparing a Lexus and a Bronco ‘by the pound’ for pricing. Neither of these items are commodities, and price per square foot doesn’t account for views, age differences, quality levels, or those nuances you mention such as disfunctional floorplan caused by a poorly planned addition, or the smell of cat pee that permeates the lower floor.
I have several agents in my area who continually seem to get the listing because they have that asking price in the stratosphere. The only results that generally come from that are extended marketing times and eventually a lower net gain for the seller than they would have had pricing it properly from the start.
How about the ones who want to lump the detached guest quarters into the living area and price it as if there were a 4,200 SF house rather than a 3,100 and 1,100 detached guest quarters?
I also have a few in my market who are spot on with the values in a particular location. They truly are the neighborhood specialists, and we talk from time to time when I’m doing an assignment in thier ’stomping grounds’, if you will. I’m one of those pesky appraisers who will visit with you regarding a curious sale.
On the flip side, there are appraisers who merely know how to pull 3 high sales within a mile of your subject and plug them into the form. Adjustments are pulled from air, comments are light, they don’t truly know what makes that market tick much less how to describe it.
What we are describing is the less than stellar performers of both sides of our industry. Not having lived in Denver in about 15 years, and not having been in the real estate industry when I did live there, I can’t tell you I’d know everything, but a good appraiser can pour over MLS data for awhile and discern trends about an area, and nuances about a particular property that you wouldn’t necessarily think we’d be able to pick up. When we can’t figure out why something sticks out like a sore thumb, we pick up the phone and discuss things with a local agent. ‘Can you tell my why 123 Bonnie Brae St sold so low?’ Chances are, it’s a poor floorplan (not visible from MLS photos) or divorce/distress, etc. It could be a fool that wouldn’t let you put a lock box on the house (Appointment with agent only listings are visible and noted by many of us. Particularly those of us who’ve sold properties) ‘Please don’t let the German Shepard out’ can easily mean, you’re gonna have to paint and recarpet. I’m going to at least investigate the possibility. Believe it or not, more of it is common sense to those of us with that ‘real estate gene’ that you’d realize. Good appraisers are far more intuitive and tuned into market trends than you may realize. It’s our jobs. Form fillers? You don’t want them around for those assignments when they have to come up with a number on thier own.
“Honestly, if you were going to list your home and wanted to price it right, would you want help from someone who actually markets (and sells) homes for a living or someone who does not? ASSUMING (and I realize this might be a big assumption) that the Realtor pricing the home is competent, knowledgeable and has your best interests at heart.”
I would have a pre-listing appraisal done. You’d be amazed how much money is left on the table because the house wasn’t priced right.
“If a residential dwelling is purchased by an investor shouldn’t the investor be entitled to an income capitilization approach. In fact doesn’t the USPAP require that appraisers attempt to use all 3 approaches to estimate value if enough market data is available?”
Absolutely. But sadly, there are appraisers out there who are simply form fillers and feel pressured by their clients to produce reports cheap and fast.
Caterina - I’m enjoying your comments. I’ve actually written two books on pricing, both of which discuss the issues you mention above. I had a real estate agent once price my house by taking the average psf of 10 active and sold properties and tell me that was the market value of my home. This was a home in the country on acreage; clearly not a tract home! I called her once to ask about recent market activity in a neighborhood where I had two rentals and she answered, again, with “well, the average psf these days is around $100.” WHAT???
You sound like an excellent appraiser who cares about the quality of her work. That’s great. Your industry, like mine, runs the gamut of competence and caring. So it’s easy to dismiss our value by referring to the ones who don’t care much about being exceptional.
Oh, by the way, my sunroom was integrated into the house - I probably shouldn’t call it a sunroom, except that it was mostly windows (very high quality windows to minimize heat/cooling loss), but otherwise, it was definitely high quality construction, not just a lean-to attached to the back door.
But anyway, GREAT post… I’d hire you to price my house any day!
Jennifer,
I have to say both exciting blogs. I really appreciate your drive for your profession. I commend you for being good at what you do, and that is SELL to clients. You are correct, Appraisers and Realtors function differently. You have have a vested interest in selling the property. An appraiser does not. I do agree, there are Realtors that know thier markets VERY WELL. I have a realtor friend and my father was a realtor, knows who built what neighborhood and the quality of the construction. Both know the trends, see older areas coming back to life… But you are correct, many appraisers (not all), do not know this information. I do like when an agent is present, because I feel I am getting an interview at the same time. There is always this TENSION for some reason. Like we cannot really TALK to eachother, but after awhile talking, both seem to relax and we talk about what is going on. It is interesting… Like talking to a used car salesman about his cars. But there are realtors that will be honest and we dig into the markets they are familiar with. I get tested on ths all the time by my real estate friends. Both have a very hard job. You need to take a home, being average to gorgeous and sell it. Get them excited about that house. That is your commission.
The appraiser, needs to know that area. You are correct, if they come from out of Town, they might do a good job, but that is not good enough. You should ensure the appraiser is familiar with the area, as this goes against the Geographic Competency. This does not do anyone ant favors. That is like sending you to another city to list a house you know nothing about the market.
I did want to make a comment, you stated above about the sunroom that is not heated or cooled like the remainder of the house and telling the homeowner to install temporary heating or a window unit to make it count as sq ft. Unfortunately, that is misleading the buyers. We use the “Residential Square Footage Guidelines” from the Real Estate Commission to properly measure and accurately define the actual HLA of a home.
I enjoy your blog… I am going to look for your books and read them. Thanks again, and I hope in the future, you have better experiences with Appraisers. As you are well aware, there are good and bad in BOTH professions and it is wise to find one that many people have had good experiences with….
Take care
Thanks, Jennifer. Likewise if I ever get the opportunity to move back to Denver. I named my company after Evergreen, Colorado in hopes of retiring there someday. We’ll see. The hubby is making noise about cold weather in his old age and some such nonsense. Now what kind of panty waist doesn’t want to shovel snow in their 70’s???
Did I read this correctly? Jennifer Allan, a realtor is saying that appraisers do not factor in things like appeal and smells and the ugly house next door? I am an appraiser and I take all factors into consideration. While I do base my opinion on actual market data, I do also make subjective adjustments for things like appeal and the ugly house next door. When my daughter sold her home I insisted she get an actual appraisal done. I would rather have an unbiased opinion of value over some realtor’s opinion who is thinking only about their commission. I’ve seen realtors blow smoke to sellers in order to get the listing, I’ve also seen realtors low ball it to get an easy sale in a few days. Just a question - What are the education requirements for a realtor? Here in Canada appraisers have to have an undergraduate degree from a University. I don’t think realtors even need high school.
I’ve worked for both a lender and as an appraiser for a consulting firm. Judging from Jennifer Allan’s comments she is completely ignorant about both the mortgage lending and the appraisal process. If the appraised price is irrelevant to the market value of the home then why are lenders spending millions a year for appraisers to determine market value? I’ve done appraising work for high risk private lenders where the market value on the report is absolutely crucial. I can tell they are calling reputable appraisers and not Realtors for their opinions of value. Her frustration with appraisers and appraising comes from ignorance. Jennifer’s uninformed comments make her appear very foolish.
It is really quite simple, The banks lend the money to buyers. The banks hire Appraisers to determing value. If the purchase price (in escrow) is greater than the lenders appraised value then guess what–the seller has to lower the price to get the deal done–period. Who is determining the market value–the lender and their Appraiser!
The reason Realtors think that they are good a pricing homes is because in the past 9 years some mortgage brokers and appraisers committed mortgage fraud by “hitting the number” on a house that was in escrow. Not to worry that business is over. New appraisal regulations are eliminating that pressure on appraisers. Get ready Realtors…there will be lots more deals falling out of escrow because the appraisal did not match the contracted purchase price.
[...] I enjoyed the questions, especially those that were generated from a provocative post by my friend Mike Lefebvre. [...]
[...] I was on last week, but like all my posts in the last two days, I had to wait until the last stop, Brooklyn. Advertise HereI enjoyed the questions, especially those that were generated from a provocative post by my friend Mike Lefebvre. [...]