Valuation Is Not A Guessing Game, It’s a Development Process
Originally Post on Cleveland Appraisal Blog
If you’ve ever had an appraisal of your home completed, perhaps you can relate to the following scenario:
The appraiser arrives at your home. You know that they have probably done a little research on what potentially comparable sales in the neighborhood are selling for. The appraiser views each room in your home, taking photos and notes as they go. The appraiser asks you about any improvements you have made to your home in recent years.
At the end of the inspection, you assume that the appraiser has to have some idea about what the value is likely to be. You ask the appraiser, “Well…What do ya think?” What you’re probably really wanting to know is what the appraiser thinks your home is worth. At this point the appraiser is likely to give an evasive reply that doesn’t answer your question. Why?
At this point, the appraiser has collected much of the data needed to complete the appraisal. The home inspection is part of the data collection process, which is only part of the overall appraisal process. The appraiser has not yet analyzed the data. The careful analysis of the data collected, is part of developing an opinion of value.
Any notions regarding value up to this point, would be merely a guess. Why can we say that it’s just a guess at this point? According to Dictionary.com, a guess is defined this way:
“To arrive at or commit oneself to an opinion about (something) without having sufficient evidence to support the opinion fully.”
After the inspection is made, there is still not enough evidence to support an opinion of value fully. There is a process that appraisers go through to develop an opinion of value. Much like in mathematics, where there is an order to things, namely the Order of Operations. Likewise, in the development of an opinion of value, there is an order to the development. If a portion of the process is skipped, the results are likely to be less supportable, and the opinion of value may be nothing more than a guess.
One of the definitions for the word develop, in Dictionary.com, is: To become evident or manifest. The appraiser’s opinion of value becomes “evident” or “manifests” at the end of the process. Not at the beginning, nor in the middle.
I often explain this to homeowners, and then I proceed to inform them that I am a bad guesser. Sometimes the expression on their face is of confusion or fear, when they hear me say that.
I always feel like the homeowner is thinking, “Why did I have to get a bad guesser? I needed a good guesser, and when the value comes in lower than what I know my home is worth, I’m going to have to find another appraiser who is a good guesser!”
I’m sure people aren’t always thinking that. It just feels like it at times.
Why do I say that I am a bad guesser? There are times, when appraising a property for a purchase, the data initially looks like it’s going to support the purchase price, that is, until I take a closer look. There may be things, not obvious during the inspection and data collection, that have a direct impact on market value.
At other times, the data looks like the value is not going to support the contract price, but low and behold, after my careful analysis, the value supports the purchase price. And yes, sometimes the market data supports a higher value than the contract price. When that is the case, my opinion of value will be higher than the purchase price.
The point being, there is a process to appraising a property, with the opinion of value being formed as the last part of the process. In every report I complete, my opinion of value is literally the last thing I derive before signing my report.
Information That Can Change The Opinion Of Value, Discovered After The Inspection
What are some things that are discovered during or after the inspection that can impact the appraiser’s opinion of value? Here are a few things…
- The subject’s gross living area is considerably different than county records and/or MLS records indicate.
- The sales originally thought to be comparable, are found not to be due to their condition, or some amenity. Or, it may be that the sales analyzed have additional parcels of land, making the sales not comparable to the property being appraised.
- It is discovered that the gross living area of the comparable sales is not accurate. For instance, it may be discovered that the listing agent included the below grade finished square footage in the main gross living area, documented in the MLS.
- It is discovered that the sale of one of the comparable sales is not an arms-length sale.
These are just a few of many things that can have a direct bearing on value. The discovery of this information, during the analysis portion of the process, can cause the appraiser’s opinion of value to change. The change may have either a negative or positive impact on the appraiser’s opinion of value.
Value Is Not Manufactured
Appraisers are not paid to guess. (Though I know some may feel otherwise) Our work is to develop a most probable sales price, based upon a certain set of criteria. At the end of the inspection, the appraiser has a lot more work to do in order to develop a supportable opinion of value. That’s why I really don’t like using the phrase, ” I came up with a value”.
While there’s nothing technically wrong with the phrase, to me, that phrase sounds like I had a predetermined value, and shaped the data to hit that number. That is a big “no no” for appraisers. We don’t come up with a value and then back into it by shaping the data. That is unethical. Even in a purchase, where we know the contract price. We develop an opinion of value based upon market data. It may or may not match the contract price.
Speaking of the contract price, it should be noted that, contrary to popular belief, two people agreeing to a sales price, is not the definition of, nor does it constitute Market Value.
The very term “market” implies that there are more than two people. Two people are market participants. They may or may not reflect the general market. The housing market is made up of hundreds, if not thousands of individuals. So, when developing an opinion of market value, an appraiser must take into consideration the most probable sales price, with the general market in mind. Not just two of its participants.
If The Appraiser Does Not Communicate Their Opinion of Value to You, There May Be Another Reason
At this point, I should clarify something. If the appraiser is completing an appraisal for a bank, the appraiser cannot give the home owner an indication of value anyway, since they can only communicate their opinion of value, or any indications of value, to their client. If the bank orders the appraisal, the bank is the only entity the appraiser can communicate their opinion of value to, unless the bank gives the appraiser instructions to share the information with additional parties.
If you, as a homeowner, hired the appraiser for a private appraisal, then you are the client. In this situation, of course you can talk to the appraiser about their development of their opinion of value. Whatever the case, one thing remains the same. The opinion of value is the last thing the appraiser will derive.
So, the next time your home is being appraised, if the appraiser doesn’t give you a value indication right after the inspection, it’s not because it is bad news. Nor is it because the appraiser is inept. They just have a lot more work to do before they can really develop a supportable opinion!
I wrote this article to give the public a little more insight into the appraisal process. Tomorrow, I am speaking about this subject, to a group of loan officers at a local bank. So, I thought I would post this article a little earlier than I had anticipated. I hope you find this information helpful. I hope that they do as well!
As always, thank you for reading my post! Have a great day!
If you’re looking for an appraiser in Northeast Ohio, give me a call! I’d love to visit with you about the valuation process!
Jamie Owen is a State Certified Residential Real Estate Appraiser located in Cleveland, Ohio. He grew up in Denver, Colorado and moved to Ohio in 1996. He has been an appraiser since 1998 and continues to work full time as an independent fee appraiser. Jamie has completed more than 7,000 appraisals in his career. He writes a weekly blog at www.clevelandappraisalblog.com, where he writes on topics related to real estate appraising and other real estate related topics. Jamie enjoys sharing information with others about the appraisal profession, while at the same time learning from other real estate professionals.