Real Estate Brokers have confidence but a real estate appraiser must have concrete evidence, especially when preparing a family law appraisal or serving as an expert witness (which is my specialty). Unfortunately, in most instances, real estate appraisers make subjective, anecdotal, arbitrary, and unscientific “adjustments” to comparable sales market data without objective market-based support. I recently encountered this situation in an appraisal that had twice the site size as all the comparable properties used in the report had. The property owner thought there should be an upward adjustment in value to the other comparable property sale prices to compensate for their smaller land sites. While this is understandable, it is more complicated than that, as we will see in this article. Here, we will see what to look for in an appraisal, and more importantly; why it’s important.
Time and time again, I encounter property features that, although sellers have invested a lot of time and money in, buyers do not appreciate. Not only do buyers not appreciate some features, but they sometimes view them as a detriment. A good example of this is a swimming pool. I have seen stunning in-ground swimming pools that were surrounded by resort-style accommodations in some backyards. Some of these are first-class true vacation get-aways; all within mere steps from the back door. Who wouldn’t want that as a bonus when buying a home? As it turns out; lots of people.
Some people offer to buy a property such as this only if the pool is removed. Yes, totally removed, as in filled in completely to make one very large flat patio area where the pool used to be. Pools, to some people, represent a safety hazard or an ongoing maintenance item that takes time and money to keep up.
Using a pool as an example, it is possible to see why a site that is twice as large as others could also be seen as a detriment. How is an appraiser supposed to know if a pool or large site adds value to a property, or is a detriment? Some people prefer NO lawns at all, and pay a lot for not having them (i.e. luxury condominiums).
What to Look For in an Appraisal
It is not the role of an appraiser to offer an opinion on property features. However, it is expected that an appraiser knows how to conduct thorough research in order to determine what features the market recognizes and values. An example of how value for a particular feature might be determined in an appraisal is illustrated below;
In this example, comp two is the same as the subject, being both properties have a one-car garage. Comp one has no garage and could, therefore, be considered inferior, and comp three has a two-car garage and could be considered superior. A look at the final values shows values that are not aligned, which suggests that adjustment values may not be correct. After looking at the adjustment values, we can readily see that if we change the garage amenity values from $5,000 to $9,000, the final values will align to the same “balanced” value much better. Therefore, although we may believe a one-car garage amenity is actually worth $5,000 (as shown in the example) close analysis reveals that a value of $9,000 (almost twice what we thought) more accurately reflects what the market indicates. This method of deriving adjustments is both provable and credible, which is what good appraisals should always convey.
Why it’s Important
On the other hand, the illustration above shows what a very poor quality appraisal might look like. The room count adjustments are all positive adjustments of $5,000. While that may be a popular opinion, and it may even be correct, can it be proven? Who is to say the value would not be double that, as in our garage example? Or less – or nothing at all? Who is to be the authority that ‘proves’ what this value should be? The appraiser is charged with proving (and explaining) everything within an appraisal. If this cannot be proven and supported with market analysis, as the garage example was, then it cannot be supported, which means it is pure conjecture and should not be valued. Proving and supporting value adjustments is why appraising is harder than it appears on the surface. The first example using garages is easy to understand because it has quality data that is used to make a supportable adjustment. Although the amount here in question may be small ($5,000) it can quickly add up to be a very large amount of value. I have personally disputed appraisals that have been over or undervalued by over $100,000 many times. When we are discussing the largest financial investment of someone’s life, this is indeed a very important issue. As a buyer would dread paying a lot more for a property, so would a seller dread pricing a property too low. Yet, this happens all the time. A high-quality appraisal can save a buyer or seller many thousands of dollars.
Why Some Features are not Valued
Now that you know the basic theory of how an adjustment can be identified and analyzed, you might be able to answer the above question, which is from an actual appraisal test. Although the owner of a property might have paid a lot of money for a heat pump to be installed, and even if it might be a very high-quality feature, we have to conclude that the correct answer is C. There is no evidence that supports a heat pump being viewed as a valuable feature in this property analysis. Maybe. Of course, there may be other features to consider, such as the garage amenities, which will then throw this analysis ‘off-balance’ and therefore suggest that a heat pump actually is recognized in the market as a value-added feature. A high-quality experienced appraiser should be able to analyze a situation like this.
The First Rule is That There are No Rules
This grid is an example of “required” (specifically notated) adjustments for site size differences. By now, we have seen that, despite popular opinion, deriving value adjustments for property features is a task that requires a fair amount of skill and experience. As in any profession, the levels of skill and experience between appraisers can vary greatly. Unfortunately, some appraisers might actually believe features can be easily quantified and categorized as the above example illustrates. The first rule of appraising is that there are no rules. That doesn’t mean appraising is a free-for-all where anything goes. Appraising is highly regulated and has well-defined methods, however, a good appraiser knows when and how to deviate from the guidelines when necessary.
As the above grid illustrates, some people really do believe appraising can be nicely summarized and put into a neat chart. Lender underwriters typically think along these lines. If it were that easy, an appraisal could be easily completed by a fancy algorithm on some website in a few moments – and indeed some websites claim to do exactly that (i.e. Zillow). That might be true – some of the time – if there is a lot of recent market data to draw conclusions from, and the properties are all very similar. However, in my experience, I have found very few properties are average, in an average neighborhood, in average market conditions. Zillow, as one example, is not focused on being accurate. With all the variables that are constantly changing, they quite simply can’t be, and they readily admit that. They do provide a good “snapshot” of the market activity in different areas, which draws a lot of curious viewers to their website, and they are therefore able to sell advertising. However, when all is said and done; we are dealing with the largest financial investment of your life, and therefore there is no substitute for a high-quality appraisal from an experienced appraiser.