Value Range Rather than a Single Point
I have been giving a value range…for many years…
By making the choice to do lender work, we also make the choice to accept some pretty ridiculous stipulations. “When you pick up one end of the stick, you also pick up the other,” my dad used to teach me. One of those requirements that have been around as long as I can remember is that an appraisal value must be reported as a single dollar amount. This, I believe, is a mistake.
By definition, market value is “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.” (Fannie Mae). “Probable” indicates flexibility and, I don’t know about you, but my opinion is rarely black and white (especially when it comes to appraised value). Our job is to look at the market abstractly and determine the most probable price in which a particular property might sell given certain parameters. Sounds pretty grey to me. You’re telling me that the house you just appraised for $210,000 could not sell for $207,000 or $211,000? Of course not. Yet, we are required to place our opinion of value into a small, “if it fits, it ships” size package.
Changing this policy would not only benefit the appraiser, but would more importantly assist the lender as it makes the loan decision. Here’s why:
Better for Appraisers
Any appraiser who has been in this game for more than three minutes understands the flaw that is inherent in pinning down the value to an exact number. Our job consists of looking at ‘comparable’ homes, making adjustments for the differences, reconciling those differences, and determining the most probable value for that subject. There is grey in what is comparable. There is grey in what the adjustments should be. There is grey in how each of us reconcile. Thus, there is grey in the final value determination.
I have been a residential appraiser for nearly two decades. For almost 20 years, I have been giving my opinion of value. I have literally given thousands and thousands of values. I can count on one hand the number of times that I have been really, really confident on the dollar amount I reported. Sad, but true.
When we look at the sales comparison approach, no two houses are identical (even townhouses or condos in the same project are different in minor ways). The circumstances surrounding the sales process are also different. Thus, it is rare when all sales adjust to the same dollar amount. A better, more accurate measure of value for our subject then would be to look at a range of value. I think most appraisers would agree that reporting a property is worth between $88,000 and $96,000 is more honest than saying that same property is worth $92,000 (nothing more, nothing less). Certainly, it is feasible that the house could still sell for $85,000 or even $100,000, but the chances are far greater that your value is accurate using a range than a pin point.
Of course, this concept cannot be taken too far, either. Saying a duplex is worth somewhere between $100,000 and $400,000 may technically be correct, but it is not very helpful to the collateral lending process. The value range should be reflected by the adjusted comparables and weight given to the MOST comparable sales as we do already.
Better for Lenders
Selling this concept to appraisers is not difficult. Each of us would agree that a step to reduce our liability and exposure is a step in the right direction. But, what about our clients? Would they also benefit from such a practice? After all, it is they who must determine our assignment conditions. I would argue that this policy change would be a huge benefit to the lenders in making more accurate loan decisions. Incidentally, it would also benefit real estate agents, judges, IRS agents, and almost any other intended user of appraisal reports.
When a bank makes a lending decision, there are many pieces to the pie that must be looked at. Appraised value of the asset is only one of them. They scrutinize work history, current debt, credit score, debt to loan ratios, and a host of other determinants. Though there are stringent rules (imposed both legally and in-house), there is also some flexibility within the process. In the end, the lender is trying to make a decision that will be in the best interest of their company. Would this particular mortgage be a good investment for our bank? By having a range of values that the asset will likely sell for on the open market, the decision maker is able to use better judgement in determining the viability of the loan on a case-by-case basis.
The current, ridged rules make for bad decisions. People who probably should get loans do not, and as we have seen in recent years, people who should not have loans, do. Often, under conventional regulations, there is a cutoff point. Using all of the other determinants, there is a dollar amount that the property must be valued at before a loan can be approved. Appraisers do not (and arguably should not) know that amount. What that means is, if the magical number is $235,000, and the appraisal comes in at $234,000, the loan is dead for an otherwise solid creditor. Again, that property is likely worth between $229,000 and $239,000, but the loan is dead because the appraiser put down the number of $234,000.
Wouldn’t it be better for the lender to be able to look at the decision in a wholistic way rather than a finite manner? I can see this scenario playing out in the smoky, back rooms where ‘evil bankers’ make their decisions: “Well, the asset needs to be worth $174,000 in order for us to make this loan. The appraised value is between $172,000 and $178,000. Looking at their credit score and payment history, they are solid. The loan is approved!” Or this: “Though the asset falls into the appraised value range, these guys just do not seem to have it together in other aspects. I think we better deny this one, Jack.” It allows us to move, ever so slightly, back to the way banking used to be in the small towns of America. Bankers made lending decisions based on good business sense rather than the arbitrary numbers all lining up.
When it is allowed, I have been giving a value range on private appraisal assignments for many years. If someone orders an appraisal from me for the purpose of wanting to know where they should list for a possible sale, for example, I give them a value range. I think that is only fair. It is certainly more accurate.
For the past year or so, I have also been giving a range of value on the appraisals I do for lending purposes. Oh, I will play FNMA’s game and give an exact value on page 2, but my CYA will be a range of values on page 3. I would feel much more comfortable before a judge and jury defending a value range than trying to prove an exact dollar amount.