Answer: Let’s ask ourselves some questions and try to understand how all the parties (appraiser, broker, lender, seller, buyer, builder, and so forth) can look at the same appraisal, yet arrive at so many different conclusions about it.
- Question #1: Low according to whom? Low is a relative term. Something cannot be low if there is nothing higher. It’s a comparison. Clearly, the lender (usually the client), the seller, the buyer, the seller, and the broker all want the appraisal to support the contract price (especially when the market does not support the contract price!). When that happens, and the deal closes, they all walk away from the closing table with money in their pockets and/or smiles on their faces.
Our job, however, is not to satisfy any of the above parties. Our job as appraisers is to provide the client with an unbiased1 opinion of the subject’s market value, as of a specific date, under specific market conditions, under a specific set of assumptions, extraordinary assumptions and/or hypothetical conditions; and be damned what anybody else thinks about our appraisal.
How can any of the above parties legitimately and without bias determine if the appraisal is low? Could the contract price ever possibly be too high? Have our broker friends ever over-sold a property? Did our broker friends paint a picture too optimistic about current market conditions? Do the above parties have a vested (e.g., financial) interest in the contract sales price? Is there any reason for the appraiser to share in that financial interest?
Therefore, when the parties say an appraisal is “low”, they are expressing nothing more than a value opinion – one they do not have to support and one at which they arrived because of bias. Appraising is easy when you get to make all the component stuff up, right?!
- Question #2: Low according to what? By what metric did the parties determine the appraisal came in low? Since an appraisal is a market-supported opinion of the subject’s value, and since that support comes from data the appraiser has verified out of the market, by what authority did any of the above decide the appraisal was too low? The fact that the “low” appraisal “killed the deal” means nothing more than (a) the seller and/or the broker took advantage of the buyer. Or maybe it means (b) the deal should die since it was wrong for the current market, as well as the buyer/mortgagor.
It is common for the seller/owner to claim it (they) had an appraisal done earlier and that appraisal was higher than this one. OK, produce that previous report so the appraiser can subject it to scrutiny (and possibly a proper Standard 3 and 4 review). Why is everybody assuming the previous appraisal is correct, while the current appraisal is somehow wrong? (Do the sellers/brokers really think we buy into that “the-last-appraisal-was-higher-so-your-low-appraisal-is-WRONG!” crap?) Hint: we don’t!
So when the parties hold the “low” appraisal to some “higher” indicator of value, why do they assume the “higher” value is correct, while the current “low” appraisal is somehow flawed?
- Question #3: What if the Realtor® (or the lender, or the neighbor, or the builder) told the homeowner what his/her house was worth and it is worth more than the appraised value? Unfortunately, our brethren in the brokerage community do not have a clue what market value is. Granted, they may know prices; but market value is a term of art with which they are either ignorant, or which they flagrantly refuse to understand and accept. Further, would it be cynical for an appraiser to say that a Realtor® might over-list a house just to get the listing (insert here gasp of surprise!)? Would it be cynical for an appraiser to say a Realtor® would then beat on the seller to take the first offer that comes is, even if it is nowhere near the listing price?
Realtors® are trained sales people, thus live from commission to commission. It is their job to sell the house for the highest possible price, its market value notwithstanding. Brokers sell one house at a time. They do not eat if they do not sell. No pressure there to do whatever is necessary (or unethical) to get that listing and that sale. We appraisers, on the other hand, are trained analysts, a higher calling. Appraisers don’t sell anything. To get paid, appraisers exercise their professionalism and, from market data, form value conclusions. Brokers are paid to do. Appraisers, however, are paid to think, both critically and systemically and then, from that thought, synthesize a value for the property under appraisal.
Appraisers measure markets to notice and interpret trends. We don’t care that the house sold for $100,000, if that sale and purchase involved the seller carrying back a 100% mortgage at one percent interest payable quarterly for 98-years (thus has a cash equivalent price significantly below $100,000). Via critically understanding that sale and purchase transaction, in other words, via its analysis, we appraisers also understand the cash equivalency calculations, by which we discover the market value of that transaction, not merely its market price. Appraisers are (or are supposed to be) the real estate market’s adult supervision. Are appraisers, too often, however, enablers of the juvenile hijinks of the brokerage community?
So, to appraisers, the Realtor’s® opinion of a property’s price (not its market price) is about as useless to us appraisers as would be steaks at a vegan’s birthday.
- Question #4: What if, at the appraised value, the seller cannot even pay off the mortgage? Frankly, that’s not our problem. Indeed, that may be the fault of a previous appraisal/appraiser surrendering to the seller’s/lender’s/Realtor’s® pressure to make the previous deal work. Had the previous appraiser exercised proper ethics & appraisal practice and come in at the property’s true market value (not the broker’s contract price) this problem would likely not exist. So don’t blame the current appraiser. Blame the previous one, as well as the seller, the lender, and the broker(s) in the deal.
- Question #5: The minds of the buyer and seller met at $450,000. Isn’t that what the property’s really worth? No, that is merely the price the parties agreed on (with a lot of help from the broker, who, as you remember, gets paid solely on commission). However, it is not necessarily the property’s market value. The two numbers may be the same, frankly, but the concepts, the definitions, the very ideas, are canyons apart. It is the appraiser’s job to measure and quantify market value, not contract price. True, the contract price may go a long way toward supporting the property’s market value, but contract price and market value are not the same concept, never have been, and never will be despite what our brethren in the brokerage and lending communities insist (and sometimes quite loudly!).
Appraisers are aware that, while they owe a duty of honesty, etc. to the client, they do not represent the client (as would an attorney) nor, therefore, are they to advocate for the client (or for any party to the transaction). To advocate for either of these would indicate a bias favoring the client (or whoever). To evidence bias also means appraisers abandon their duty to objectivity, impartiality, and independence. At that point, they are essentially brokers, who have no such ethical requirements.
So when we appraisers hear the complaint that the “…the damn appraisal came in too low!”, about all we can do is empathize with the other parties’ positions. Assuming the appraiser did not make an error (which is a real possibility), then the other parties’ position that the appraisal is “low” has no market support whatsoever; it is their biased, unsupported (and therefore worthless) opinion. The appraiser’s value conclusion, however, has that market support (or it damn well should) and, therefore, by the only viable metric there is, is the more correct, the more credible, of the two.
Market support for the appraiser’s market value conclusion(s) is the key. Appraisers have that market support (they hope!). The other parties merely have data on price. Do appraisers understand the difference between market value and market price2? Do appraisers apply this understanding to their valuation assignments?
So, did the appraisal really come in low, or was the appraiser merely exercising proper due diligence and professionalism? We are professionals paid to form market-supported value opinions. We are not rubber-stamps for the lending and real estate brokerage machines. Because we are professionals, we owe it to ourselves and to our clients to charge professional fees and provide our clients with professional-level appraisal services.
1 The 1004 form tasks us with delivering to Fannie Mae an “accurate” appraisal. The only problem is, nobody has a clue just what an “accurate” appraisal is, nor any metric by which to measure that accuracy. USPAP, however, merely requires us to provide the client with a credible appraisal. USPAP’s definition of credible, worthy of belief, however, does not tell us of whose belief the appraisal must be worthy. And then, is the appraisal supposed to be credible, or is the appraisal report supposed to be credible? Remember, the client rarely sees the appraisal (i.e., the workfile), but sees the reports all the time.
2 Unfortunately, there is a lot of evidence they do not. Price contains the influence of financing. Market value, by definition, does not. That appraisers are unclear on this dichotomy is hard to explain.