Appraisals, Olympic Gymnastics and Other Absurdities

avatarthumbnail.jpgAfter nearly two full weeks of watching Olympic gymnasts and divers perform to the best of their capabilities only to watch helplessly as mindless judges give an allegedly objective but thoroughly subjective score, I’m done.

Give me black and white. Give me Usiah Bolt playing the Roadrunner to the rest of the field’s Coyote, sprinting to an unthinkable, unfathomable time in the 100 meters. There’s a purity there since no point was there a risk of the gold medal being awarded to the clear third-place finisher because Bolt broke form in the final 15 meters.

If nothing else, I suppose credit is due to the gymnastics and diving judges because deep down they realize they are giving subjective scores. They set the bar with the first to go and then hold all other performances up to that standard. (How it ends up that someone can land on their knees and still take bronze, though, is beyond me.)

Appraisers don’t seem to enjoy the same level of self-realization. It continues to amaze how many appraisers view the number they write on their piece of paper as the ultimate test of a home’s value. And that’s simply not the case.

Take a look at this actual comment from an appraiser, responding on the Arizona Real Estate Educators’ Association’s listserv, in explaining why it’s a good thing that Ameridream is going by the wayside barring further congressional intervention:

“Hopefully the DPAs [down payment assistance programs] will permanently disappear. Realtors never used them correctly anyway. As instructors we need to remind or teach that financing concessions are NOT value. If a house sells for $100,000 you do NOT add the $8,000 in concessions on to make the sales price $108,000.”

Which is correct, if not slightly misguided. Misguided in that there is no concrete “value” for any property, no matter what anyone may have you believe. Value in a free market is the point at which someone is willing to buy and someone is willing to sell.

“Unfortunately the $108,000 gets recorded as the sales price, thus inflating the market as that becomes a comparable.”

Let’s take a quick step back and change the scenario slightly. Let’s say a home is listed at $100,000 and someone decides to purchase the house for $108,000 cash. No appraisal needed because there’s no loan involved.

What’s the value of the home? It’s $108,000 – the point at which buyer and seller came together and agreed to buy or sell. As a comparable, is this any more or less valid than a sale where someone comes in and offers $80,000 cash?

Of course not. It’s merely a reflection of the market.

Do you know how many homes sell under “appraised” value? Or how often the appraisal on a resale purchase comes in within a few hundred dollars of the contract price, as if by magic? Value is a reflection of the market and the price at which homes are being bought and sold provide that reflection.

It makes sense to try and compensate for seller concessions but it’s dicey as best, as you never know what the amount of those concessions may be. The assumption is 3% of the sales price since that amount usually covers buyer closing costs in Phoenix. But I also can tell you of a home I recently sold where the concession was 1.5%, so anyone making the assumption of a 3% concession is going to undervalue the home by 1.5% – roughly $4,200.

Imperfect assumptions – declining market, automatic 3% seller concessions, etc. – lead to a seemingly incorrect result … unintentionally, but still the case.

Much like the Olympic diving and gymnastics competitions, where assumptions along the way – that there needs to be room in the scoring in case there’s a “better” routine – just for starters, the end result can be confusing. If not downright infuriating.

[tags]Phoenix real estate[/tags]

Jonathan Dalton

Jonathan Dalton is a 40-plus-year resident of the Valley and has been helping folks buy and sell homes since 2004. He can be reached at 602-502-9693 or info at allphoenixrealestate.com.

2 Comments

  • Charleston real estate blog 9 years ago

    And the appraiser said, “As instructors we need to remind or teach that financing concessions are NOT value.”

    I can only be thankful that I did not have an appraiser teach me during my elementary, high school or college or even my real estate classes.

    The appraiser offers an *opinion of value*, they are not in the real estate industry to teach.

    This particular appraiser who was quoted is just a little too haughty for my taste. More importantly, they seemed to have forgotten how to appraise and it is only now they are waking up to the errors of their ways so as to avoid a trip to jail.

  • Jim Little 9 years ago

    Nice seque Jonathan. I expected another former sportswriter article, instead got a well-reasoned expose.
    It is amazing how many appraisers would ask “What is the contract price?” before an appraisal.
    It is also amazing how close the appraisal often came, even when the contract was low.

Comments are closed.

Real Time Web Analytics

Send this to a friend