A few months back I wrote an article that described the gap that’s been showing up between the price that the buyer is willing to pay for a property and the appraisal for that property. In that article I suggested that the main cause of the gap was that appraisers use historical data to calculate their property value estimates, and because the market was so depressed for so long, appraisals are frequently coming in lower than the values the market will seemingly bear. I got very good feedback on this article as well as some not-so-good feedback. One of my neighbors, who just so happens to be an appraiser, brought it to my attention (strongly) that I had greatly oversimplified the appraisal process and the factors that go into appraisers' calculations. (If you know where I live then you pretty much know where he lives.) I did not intend to imply that historical data was the only factor used by appraisers, or to devalue their important work in any way. My intention in that article was to highlight that there often is a gap and to outline some of the struggles and challenges that appraisers and real estate brokers are still feeling in the aftermath of the 2008 crash.
So I sat down with Cother, (not his real name), and he reminded me that he also relies on other indicators in the market, such as listing prices of other properties and current contracts that have not closed yet, to adjust appraised values to more accurately reflect the current market. He applies adjustments to the listing prices based on what seems to be the average variance in sale price versus list price to give himself a more forward picture of the market. Naturally, he is not able to use these as comps, but it does provide an idea of where the market is heading. He can also look at how long a property has been on the market. This is generally a good way to determine if a property is overpriced.
Keep in mind, when real estate agents are representing sellers, it is our job to help the seller make as much money on his or her property as possible. It is very rare that the seller gets more than the asking price (although from time to time it does happen) and typically the negotiations result in a deal that’s lower than the asking price. Therefore, we list properties at prices that are higher than we actually expect to sell them for so that we can allow the market to determine the value. We calculate what we believe to be the highest amount we can get for the property. I don’t think this is a secret; in fact many appraisers will (and should) consider a common reduction of a list price as a part of their standard procedure when determining how that listing price might influence the appraisal. So the fact that agents often start off with inflated listings is certainly a contributing factor to gap between the appraisal and market value.
Most real estate agents are not trained to the extent that appraisers are in determining the value of a property, any more than most appraisers are trained to act as real estate agents. Possessing the expertise to account for all of the adjustments necessary to determine property values – especially commercial properties, which usually have many more variables and considerations – is a very difficult challenge. While historical data is certainly one of the key factors that appraisers use in their calculations, it is far from the only one. Knowing the life expectancy of the components of a building is a prime example. Are the air conditioning systems in good working order? Does the roof need to be replaced? Are the restrooms in compliance with current building codes? There are many considerations that determine if a property is in a condition that allows for immediate use or if additional funds will need to be spent.
Some appraisals are easier than others by virtue of the amount of information that’s available on a property. There may be a large sample of similar properties by which to compare the subject property. Investment properties typically have a lot of data that can be used to help in appraisal calculations, such as the annual income, the quality of the tenants, the type of lease, and the location and condition of the building, to name a few. At the same time, there may be a limited supply of similar properties that can establish a market cap rate. Regardless of the situation, there are numerous things that differentiate one property from another – and all of them must be accounted for in the final appraisal.
While it may be inevitable that agents and appraisers will butt heads, I’ll be the first agent to vouch for the value of and need for appraisers. Quality appraisers serve as the objective voice in the equation. They are required to serve as impartial judges of the market and are critical for ensuring that buyers and sellers are not taken advantage of. They also assist banks and mortgage lenders in managing risk when deciding how much money to lend to buyers. Remember, selling agents are trying to get as much as possible for sellers while buyer’s agents are trying to help their clients pay as little as possible. Appraisers are trying to provide information on what they calculate to be a value that both parties can rely on. The value is always somewhat subjective and arbitrary because the only hardline value is what the market is willing to pay.
Choosing an appraiser is no different than choosing a doctor, a handyman, a mechanic or a real estate agent; there are good ones and bad ones. Some are experienced and others are not. Some are honest and trustworthy and others are less so. Some do their homework and work very hard to produce accurate appraisals, while others do the bare minimum and rely on rudimentary output from software with no fine-tuning or adjustments. The next time you need an appraisal, my suggestion is to find an appraiser with substantial experience and a reputation for integrity and thoroughness. A good appraiser will have robust justification for how he or she arrived at a particular property value, not just three comps.
Grayson Powell is a Managing Partner at Coldwell Banker Commercial Sun Coast Partners (CBCSCP). CBCSCP leverages the vast experience of highly skilled real estate professionals and developers and specialize in selling, leasing and managing retail, commercial, and investment property. To learn more about CBCSCP, visit www.cbcwilmington.com or call 910-350-1200.
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