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Don't Shoot The Messenger

You get a copy of the appraisal report from the bank. Your eyes skim through the report until you arrive at the estimated value. Your blood begins to boil as you see that the estimated market value is less than what you had anticipated. Now the bank is not going to lend you as much as you would like and the home that you fell in love with appears to be unattainable. Did the appraisal kill the deal? As an appraiser, I would suggest that the answer to that question is really a matter of viewpoint. To a realtor, buyer, seller or loan officer, the answer is likely to be "yes". And if I am being honest, if I were one of these individuals involved in the transaction, I would probably feel the same way. In this situation, some of the parties involved are not just disappointed at the information. They are angry at the appraiser. Some of the participants in this situation may feel strongly that the appraisal is worthless because it came in lower than anticipated. Why?


Some feel that because an appraiser's estimate of market value is just that, an estimate, that appraisers have the liberty of just picking any number, as a value, if there is some sale in the neighborhood or surrounding areas that has sold at or above the purchase price of the home being appraised. Some seem to feel that the appraiser's main job is to complete a report that helps to justify the purchase price. In this situation, often a home owner or realtor will send sales to the bank for the appraiser to review. They usually claim that the sales they have sent support a higher value estimate than the appraiser's. The problem is that the sales they provide are almost always superior to the subject in terms of physical characteristics or location or are simply not comparable. When the market adjustments are applied (including location adjustments) to the additional sales provided, they usually adjust to very close to the appraised value. Speaking of adjustments, those are not just made up, or plucked from the air, as some say. (PFA - Plucked From Air). Adjustments are made based upon numerous methods including multiple regression, paired sales analysis, income capitalization and depreciated cost new methods, to name just a few. The data for the adjustments are derive from the subject's market area. So contrary to popular belief, there is little "wiggle room" if the adjustments are made properly.


Another reason people become upset is that they know that the appraisal is an opinion of value. Of course, everyone has an opinion. So, what makes the appraiser's opinion more reliable than the buyer, seller, realtor or loan officer? For one thing, the appraiser is the only person in the transaction that is unbiased. In a purchase or even a refinance, the appraiser is really the only individual involved who is a disinterested third party to the transaction. This is evident in cases where the estimated market value comes in lower than the purchase price. Who typically gets upset? Typically, it's the buyer, seller, realtor or loan officer. If an individual gets upset at the opinion of value, can they really be disinterested?

Another reason an appraiser's opinion of value estimate is more reliable (typically) is that we have extensive training and experience in the appraisal profession, which includes understanding how market value really works and is measured. And it is more complicated than most realize. If it were as easy as just putting a few similar sales on a grid and making a couple of non-supportable adjustments, then anyone could do it. I have been appraising full time since 1998 and I still learn new things on a regular basis. Some things are not as clear cut as they might appear on the surface. Often, when an appraisal comes in lower than the purchase price, the appraiser's skills are often discounted in the minds of those involved in the transaction. That's usually the time when a borrower should pay even closer attention to, and even appreciate, what the appraisal is reflecting.



To illustrate, imagine that a person goes to a department store to buy an expensive watch. They find exactly what they wanted. It fits great, looks great, and the person wants it. They plan on using their credit card to make the purchase. However, at checkout, the cashier says that the card has been declined because there is not enough available credit on the card. So, who killed that deal? Was it the clerk who stated the amount that the watch was being sold for? Was it the bank who said that there was not enough credit on the person's credit limit? Does that mean that the watch cannot be purchased? Of course not! It just means that the person is going to have to find another way to pay for the portion of the watch that cannot be financed. But it is up to the person buying the watch to decide whether they want to make that purchase. It's all about choices. If the person has no way to pay for the remainder of the balance, wouldn't that be more of an affordability issue? What if the buyer decided to go and price shop that same watch at other stores? They might find that the same watch or a very comparable watch is selling for less at other stores. If that was the case, wouldn't the buyer be relieved that the first transaction didn't work out? But what if the buyer had decided to purchase the first watch and just pay cash for what couldn't be financed? Now they find out that they over-paid. Then who should they be mad at?



It is good to remember that while the estimated market value might be bad news for some of the parties involved, it may be good news for the other parties involved. I recently appraised a property for $20K higher than the purchase price because the seller did not use a realtor and priced their property based upon what a popular AVM stated their property was worth. Of course, the data that the AVM utilized for the gross living area, was not accurate. When I measured the property, I found that it was larger than what was reported with the auditor. Perhaps the seller should have had an appraisal done by a licensed or certified appraiser to determine their asking price.

So, if the appraised value is less than the purchase price, please don't shoot the messenger! Appraisers are messengers. Appraiser's don't create market value, they only measure it. So, if the news is bad, blame the market, because that is where the appraiser obtained the data that was used to derive the value. Appraisers are not here to make a deal work or to kill a deal. Our job is to estimate the market value, in a supportable way, that is not based upon emotions. Our value conclusions are based upon data, facts and a careful analysis of the market.

Each appraisal contains a lot of valuable data above and beyond the value estimate. There is a lot of work that goes into an appraisal. Have you ever noticed that the value as at the end of the report? That's because there is a lot of information in the report that has to be analyzed before the value is derived. The estimated value is the last thing that is developed.

So, if you are the recipient of an appraisal that came in lower than you expected, instead of being upset at the appraiser, use the information to make an informed decision about whether or not to move forward with your purchase. If the appraised value is lower than the purchase price, and you're the buyer, you can bring cash to the table and still purchase the home if you wish. In the end, I would respectfully suggest that appraisals don't really kill the deals. They just help assist the parties involved in the transaction to make decisions regarding what they are willing to do, or not do. I hope that your next appraisal is good news, like the gentleman's appraisal of his watch in the video below!

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