Appraisal … the word to many is akin to the gospel handed down from the heavens, an unassailable determination of a property’s true worth.
Sadly, the reality is a bit different.
An appraisal is one person’s opinion of value. No more, no less. It’s an informed opinion, to be certain, based on experience, training and guidelines developed to help an appraiser determine what a property’s value might be. But it’s still an opinion and as such it carries a certain bias.
bias (n, adj, adv, v) a particular tendency or inclination, esp. one that prevents unprejudiced consideration of a question; prejudice.
Appraisal values often vary depending on the purpose of an appraisal. For instance, an appraisal contracted by a lender for a refinance almost always will come out higher than an appraisal contracted by a lender for a new purchase. The reason is simple – the bank doesn’t care what the home’s real value is, it just wants a tool to help evaluate the level of risk associated with the loan. On a refinance there’s already equity in the home, the risk is inherently lower and appraisers tend to be a little more liberal in their estimates.
So what to make of an appraisal for appraisal’s sake, say for a home owner who wants to determine the intrinsic value of a property for whatever purpose?
Read on …
How much is this home on the left worth? It’s an unfair question to ask of you, really, as you have neither the home’s particulars nor the recent comps in your hands.
However, two appraisers working to set the value of a neighboring home did. One was working for the seller. The other was working for a lender who was going to underwrite a new home loan.
Both started at the same place – a 5 bedroom, 3 bathroom home with a pool, 2,569 square feet with a three-car garage built 10 years ago. From there, though, the two appraisers went vastly different directions.
(Keep in mind, the adjustments about to be mentioned were made to equalize this property with the subject property down the block.)
The lender’s appraiser started with the sale price of $169,000 and made the following adjustments:
- Subject property upgrades: +$7,500 compared to the home pictured above
- Square footage: -$9,450 (the home above is a bit larger)
- 3 full baths versus 2.5 in the subject: – $3,000
Total adjustments – $4,950.
The appraiser for the seller, viewing the same property just two weeks earlier, had a bit of a different opinion:
- Subject property upgrades: +$10,000 vs. the $7,500 addition on the new appraisal
- Square footage: -$11,000 vs. the $9,450 deduction above
- Bathrooms: $2,000 for a third full bath versus a half, vs. $3,000 above
So … two different appraisers and, putting aside the different values for the upgrades, two different sets of values attached for a full bath versus a half bath and for the exact same difference in square footage.
But we’re not quite done …
- The lender’s appraiser decided the 3-car garage on the home above didn’t merit an adjustment compared to the subject home’s 2-car garage; it’s listed as an “offset” presumably due to other changes to the property. The seller’s appraiser included a -$2,000 adjustment to value.
- The lender’s appraiser made no adjustment for the condition of swimming pools, rating them equal; the seller’s appraiser assigned a +$5,000 bump to the subject property for the pool.
- The lender’s appraiser, having addressed upgrades earlier in the appraisal, let the original adjustment stand; the seller’s appraiser assigned a $5,000 increase in value to the subject property on a separate line item on top of the $10,000 already given for better condition above, essentially counting the same upgrades twice.
- The lender’s appraiser made no adjustment for landscaping; the seller’s appraiser assigned a $3,000 increase in value to the subject property for landscaping.
The bottom line? The lender’s appraiser ended with a net adjustment of negative $4,950, bringing the comparable value of the home pictured above to $164,050 (again, these are adjustments designed to provide an apples to apples comparison.)
Meanwhile, the seller’s appraiser ended with a new adjustment upward of $7,000, giving the home pictured above a comparable value of $176,000.
Two appraisers viewing the same property two weeks apart assigned values $11,950 apart from each other – $15,000 of that difference came in the four line items at the bottom of the seller’s appraiser’s assessment.
Who is right? Unlike the now-solved mystery of how many licks it takes to get to the Tootsie Roll center of a Tootsie Pop, the world may never know.
But wait, there’s more!
In the same two appraisals was another property … but, truthfully, I don’t have the strength to take you through the adjustments to this one in the same detail (and, quite frankly, I’m not sure anyone’s still reading after the Tootsie Pop link.)
And so I’ll simply summarize – this second home sold for $170,000. The lender’s appraiser assigned a comparable value of $158,020. The seller’s appraiser assigned a comparable value of $167,000, a difference of $8,980.
Two properties, two stated comparable values differing by a total of $20,930.
Both appraisers will tell you they are correct; in fact, they attest to this fact in the several pages of boilerplate that comes attached to every appraisal. But they can’t both be right. Or can they?
After all, the appraisal really is nothing more than an opinion of value. The weight of that opinion isn’t determined by the appraiser but by those who are using that opinion for their own purposes, whether it’s to defend a high list price or to explain a decision not to write a loan for an agreed upon sale price.
Gospel proof of a home’s intrinsic value, though? Absolutely not.[tags]Phoenix real estate[/tags]