An Appraisal is not THE Opinion of Value
Some of you are going to need to hang up your ego hats for this one. You know who you are. I see you hanging out on the online appraisal forums. You are the ones who do not just have an opinion, but THE opinion. Don’t worry, I will let you put it back on before I am done.
As appraisers, we are often asked a question similar to this, “Why can two professionals appraise the same property, yet come up with two different values?” It is an excellent question, and one that has many variables, but I want to focus on just one aspect of the answer today; because appraisers are giving opinions of value not facts of value. There is a big difference (and the latter does not exist).
I am currently working on an assignment in a rural area. When I say ‘rural,’ I mean po-dunk. The subject property appraiserOpinionhas neighbors, but they are miles apart, not feet. There were a total of 22 sales in the entire county last year. That is the kind of rural we are talking about here. Construction costs are high in this area because materials and laborers have to travel from a town 76 miles away.
The appraisal is for a new construction loan on a modular home. The house will be factory-built and trucked in to be set on the foundation which sits on 10 acres. No problem. I have been covering this area for over 15 years. I feel geographically competent. I have taken multiple classes on factory-built housing, have appraised hundreds of modular and manufactured homes over the years, have done thousands of new constructions, and feel competent for the assignment type as well.
Before I even began the assignment, I knew there were no recent, modular home comparables. Even going back 36 months yielded no results. I chose to use manufactured homes as well as stick built homes and make adjustments for each. The appraisal process was no walk in the park. I knew it wouldn’t be and charged my fee accordingly. Once finished, I felt as confident as I could given the circumstances. The problem was, I came in $116,000 lower than the cost of construction (and that didn’t include the value of the land which they already own). I braced myself for the phone calls which I knew would surely come.
Sure enough, a few days later my business line was ringing loudly. Now, this is a good client. I have done a lot of work for them, and did not wish to make them upset, but I also am not one to sell my integrity in order to keep working for a particular lender. As you can imagine, the lender is now in the unenviable position of explaining to their client that they will need to bring over $100 Grand to the closing table if they want to proceed. I understand their concern for sure, but there was not much I could do and explained that to them. It was then that they informed me that mine was the second appraisal they had had done on the property. The first one was completed six months previously and the borrowers had to back out ‘because the timing was not right.’ Uh huh. Furthermore, just a few months ago, the value of the property was approximately $60,000 higher! It still did not cover their construction costs, but it was a lot less of a spread than my opinion of value.
As I talked to the nice lady on the phone, it became very obvious very quickly that the previous appraiser had done two things differently than I. First, he did not use any manufactured homes as comparables. Second, the stick-built homes that he used were custom-made, site-builds and no adjustment was made for the difference. I was asked, quite forcefully, to explain why two appraisers could come up with such dramatically different values. My answer was simply, “Well, I cannot speak of the other appraiser’s work as I have not reviewed their report, but I can tell you that an appraisal is an opinion of value. I can only speak to my work and I believe my opinion of value is well-supported.” And I did. My work file was full of statistical samplings between manufactured homes and modular homes as well as between modular homes and site-built, custom jobs. Granted, there were no comparisons in the subject’s neighborhood as there have been no recent modular home sales, but a fair amount of data from surrounding counties showed a definitive percentage difference between manufactured and modular and modular and site-builds. In other words, in my opinion, the original appraiser was just wrong. He or she either did not know enough to look at the differences or they chose to ignore the data. Either way, we have two appraisal reports and two very different values.
“Why can two professionals appraise the same property, yet come up with two different values?”This experience, once again, reminded me that appraisal is not an exact science. In many ways, what we do is scientific, but in many ways what we do is also an art. What is a deck really worth? Well, there are as many ways to answer that question as there are answers. Certainly we could agree that some ways of supporting adjustments are better than others, but in the end, the appraiser must make a decision. That decision is an opinion, but is not the only opinion. I do not know who this other appraiser is, but I do not have hard feelings toward them. They have their opinion, and I have mine. I just believe my opinion is the right one. We can use all of the fancy tools we can find to support our adjustments, but in the end, we are providing an opinion, nothing more.
Oh, and don’t forget to pick up your ego hat on the way out the door.