Appraisals are a necessary part of the real estate buying and selling process, often the last hurdle buyers and sellers need to clear to secure the sale. Thus, there are a lot of opinions on how they ought to be performed and reported.
An appraisal is an individual’s opinion or estimate of a property’s value on a given date. This estimate is produced in a written appraisal report, which includes data collected and analyzed by the appraiser to back up their opinion.
Usually, the appraisal is reduced to an exact dollar amount. But how useful and accurate is that single point valuation?
The numerous, and sometimes nebulous, factors the appraiser uses to determine a home’s value include:
- demand, or the number of buyers for the property;
- utility, or the property’s possible uses;
- scarcity, or the availability of similar properties; and
- transferability, or the seller’s ability to transfer clear title to a buyer.
There are various outside forces that also influence value, including:
- physical considerations, such as the property’s proximity to amenities, transportation, views and aesthetics;
- economic considerations, such as rents and vacancies in the area, the local homeownership rate and the local job market;
- government considerations, such as property tax rates, zoning, building codes and local services; and
- social considerations, such as crime rates, school rankings, shopping and recreational opportunities.
Each of the factors that goes into these considerations has a (mostly subjective) value, on top of the value assigned due to the specific property’s considerations such as size, lot, condition and so on. Therefore, it’s easy to see how the assigned value will vary depending on the appraiser conducting the valuation.
When the appraisal is conducted for homebuying purposes, it’s also easy to see how the appraiser’s valuation often coincides with the price agreed to in the purchase agreement: the appraiser does their job to examine the various market factors, comes up with a range, and if the agreed-to price falls within that range, why not set the appraised value at that same amount, which likely coincides with market value anyway? This makes everyone happy, including the buyer, seller and the lender.
Fine. But appraisers operate in a subjective business, and their valuations ought to reflect that in the most honest way possible.
The Chief of the California Bureau of Real Estate Appraisers (BREA) examines the trouble with single point valuations in the latest issue of the BREA bulletin.
He proposes that, instead of a single point valuation:
A more realistic communication of an appraiser’s opinion would be providing an estimated value range together with an appraiser’s rating of the level of confidence.
The Bureau Chief goes on to acknowledge that the industry requires appraisers to provide single value opinions, and appraisers need to continue to do so until standards change. But he also stresses that a single valuation is not always needed — for instance, when conducting appraisals directly for a client’s needs (when a lender is not involved) a valuation range may be acceptable and preferred.
Appraisers may provide a value range instead of a single point valuation when conducting these private needs assessments, and in the end, this produces more confident reports.
Real estate professionals: do you think a value range is a better way for appraisal valuations to be conducted than the current norm of a single point valuation? Share your thoughts and experiences in the comments!