by Brian Forbes
Most of the misunderstandings in appraisal reports are due to the appraiser’s selection of comparables.
Remember that appraisals are professional opinions of value. If you give three different appraisers the same subject property to appraise on the same day, the value reported will be different, but probably in the same range and not all of the appraisers will use the exact same comparables.
When choosing comparables for an appraisal, the appraiser may go through a list of dozens before they decide on the final comparables to use in the report for valuation. Then they narrow the comparables down to decide which ones will be the greatest weighted comparables in the #1, #2 and #3 positions on the grid in the report. Other relevant comparables will be selected for the #4, #5 and #6 positions, which may include listings to support value. The appraiser has to weigh the different variables in order to decide on comparables used in the report.
There is the timing of the sale, the size of the GLA (gross living area) including the number of bedrooms, bathrooms and amenities as well as the size of the lot, the condition of the structure, the age of the structure, neighborhood characteristics including views, and even the style of construction and construction materials. There are a lot of criteria the appraiser has available to choose from.
And here is where a lot of the confusion comes in. The appraiser is interested in giving a fair market value for the property, not necessarily to highest market value for the property. Remember that the purpose for the appraisal is to give the lender an idea of what the property might sell for at that given moment, in the event the property were to be taken over by the lender.
Although the borrower is paying for the appraisal, the client is actually the lender. This being said, the appraiser has to select comps which in their professional opinion represent the market at that point in time. If there are foreclosures in the neighborhood, then the appraiser may have to use them in the report, even if it appears that there may be other higher valued comparables to choose from. It may be that the foreclosures are more representative of the market as a whole.
What borrowers and brokers don’t often understand, or seem to forget, is that the appraisal is a snapshot in time of the market’s reaction to the subject property, rather than a value of the property by itself. This is the difference between a sales comparison approach and a cost approach. Often borrowers feel that their homes appraise lower than they should after they done so many improvements. But they don’t fully understand that while the appraisal may take into account some of the improvements, it is more based on how these improvements compare to other homes in the neighborhood.
In the appeal process, often borrowers or brokers will send in additional higher valued comparables and want to know why the appraiser didn’t find the higher valued comparables in the first place. The appraiser doesn’t list all of the comparables they research before they select the final ones to be used in the report. Most likely the appraiser is aware of the comparables submitted for appeal but didn’t use them for one reason or another.
The bottom line is that the basic intention of the report ends up misunderstood. In the borrower’s and broker’s eyes, the report is supposed to give the highest value in the market. From the appraiser view point, the appraisal is supposed to give the fairest market value compared to other recent and like sales in the market.