Is There a Fourth Approach to Real Estate Value?
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I want to talk to you about the fourth approach to value…
…and specifically an occasion on which it truly saved my bacon.
Now, I know a lot of you real estate appraisers out there probably started chuckling as soon as you read the words ‘fourth approach to value.’ If you did, I get it, believe me! I used to be the same way. Over time, however, I’ve grown to see how it can often be a vital part of the valuation process.
Let’s have a quick recap for anyone who’s either forgotten the fourth approach, or never learned it to start with. You have your three traditional approaches: market, cost and income. The ‘fourth approach’ is basically like sitting on the curb across the street from your subject, after carrying out the inspection and asking yourself, “Well, what the hell would I pay for this thing?!”
It’s not the most… scientific approach, obviously. I would argue, however, that real estate appraisal isn’t an exact science anyway. Hold the flaming tomatoes. Hear me out! You have the cold, hard facts, sure – the math, the stats, your informed judgment – but when it comes down to it real estate appraisal is an art form. Sometimes it boils down to what you feel inside; what’s in your gut. That doesn’t mean you can just go around placing whatever value you please on every property, but a gut check can be vital to reaching the correct valuation.
I had an experience recently, which was what originally got me thinking about this. I was on my way to appraise a property, which had originally been designated as a single-family, before my assistant and I worked out that it was really a multi-family. Sure enough, on arrival, it was a detached, multi-family, fourplex: a single family home in the front, with three apartments in the back.
In my experience with properties in my area, nine out of ten times the highest and best use is multi-family (when you have the choice). After the property inspection, I got back to my office and got to work. I used good comps and good adjustments, all the while having the highest and best use as a multi-family (I know, before you say it, that that’s the first thing you’re supposed to do; I admit to and talk about my mistakes so that you can learn from them). Finally, I got to the reconciliation, and the value for the property – bear in mind that this was a nice, big house – and the number that came out was way, way off.
I applied the fourth approach to value. I said to myself, “Dustin, would you pay $X for this house?” The answer was a big, fat ‘no.’ To cut a long story short, I found out what the problem was, rectified it, and came up with a much more accurate valuation. If I’d never taken the time to evaluate objectively – if I’d simply accepted that initial value – I could have been in big trouble.
That’s what the fourth approach to value is all about: giving yourself the opportunity and the time to take that step back and look into your gut. Learn to trust your instincts as a real estate appraiser. Trust what you feel inside, then go back and find good, relevant data to support (or not) your inclination.
For more information on this subject, please download and listen to The Appraiser Coach Podcast Episode 023 – The Fourth Approach to Value
It’s called the gut check when the report is finished.
Dustin, considering in the past YOU (Basically your team / my guess 95%) have proclaimed to be completing 3 to 8 assignments per day (Monday only office days), I think YOU should spend more time on the first three approaches before you tell us about a fourth. (IF) you have non-licensed office staff defining market areas, selecting a group of sales/comparables for you, using these sales to establish market trends and you swoop in and do a 20 minute review (my guess), your words hold limited weight in my eyes.
Seek the truth.
Seek better grammar. You as a verb, that’s news to me.
In normal routine approach, I take the time to read full MLS pages of no less than about 50 to 100 market examples of various filtered and unfiltered comparison points. Then I turn to logical comparisons and seek the necessary extrapolation, or perhaps turn to distributed allotted adjustment amounts based on sensible direct examples. It’s the reliance on automation in pursuit of more work volume which is more likely to cause appraiser judgement error. There has to be fair balance but the numbers speak for themselves; appraiser populace is half of what it used to be. Automation indeed has a price, the examples are endless. As always in my valuation approach, assigning a value is the absolute last action of report development. The methods used to develop the report conclusions, if sound, lead to credible valuation and that’s why assigning value should never come before detailed credibility analysis. My gut instinct tells me this industry is moving entirely too fast for it’s own good as a common rule of thumb.
I think those who “cant”… teach I have seen this guy live, not a thrill. guarantee he makes more charging for his “seminars” than he does approving his non-licensed employee’s appraisal reports.
Well, at least he’s got an article on this blog. Where is your article? If being critical, please have a point.
I suggest you go to his website and read my NUMERIOUS comments concerning his past blogs and podcasts. I’m critical, and have a point.
Seek the truth.
Hello my buddy Baggins,
Just wanted to point out that as far as an article on this blog he maybe better off taking it to the TV. I have the poor-boy standard TV cable service with a whole bunch of channels. If I were not a pitiful appraiser I could subscribe to the Digital Val-U-Pak with another hundred channels. However I can also choose NETFLIX, ROKU, BBQ and all of the other foolishness. These TV stations need some talking heads/crap 24/7 all year long. No wonder there is nothing to watch!
Personally, I do not think much of self appointed gurus. But, that is just my silly opinion. You guys/gals spend/send your money and measure the financial return. Best of luck to all of you!
Bill, In the seminar that I attended he stated that he did not review every report so your 20 min estimate is more generous than he deserves.
His seminar should be named “Skippy 101”. If I would have seen that he was the author of this article I never would have opened it.
I have to agree with him on the final gut check of the report. AFTER the proper course of inspection and comparables searches with a determination of value, does it still seem reasonable that the open market would agree with you, the value opinion….this has been standard with the AQB teaching and continuing education. I’m not sure that I would call a valuation method all on it own. I just think that it is a natural part of the process. If you only look at data then you are missing the human element and would glean over issues with the fenestration, functional utility of the interior and exterior that often are non-quantifiable variables that just may fall in this realm.
So true! I sold real estate for 15 years before I became an appraiser. Also I have an excellent business and real estate education. Appraisal is an art as well as a science and that can not be repeated enough to the number cruncher’s and guideline freaks. In some neighborhoods and for some age homes the science works better than others.
True. The other approach I like to use is the approach that I heard lenders were using during the last housing bubble to review appraisals. Pretend you are a seven year old and then look at the picture of the subject and the picture of the comps, are they similar or different?
Dustin when I took my first two AI (then AIREA) courses at Biola College the instructors told us all about the best computer and software ever conceived. It was so complex and data inclusive that no one could even explain how it worked.
Our own minds. We calculate, adjust and analyze without ever being aware of it. We screen and filter data for relevance faster than any man made computer in our subconscious. My instructors told us NOT to ignore our own computers results just because it didn’t have a fancy name (mine’s just plain old Mike; v66).
While never an ‘accepted primary appraisal method’ it WAS taught and thought to be the near equal checks and balance for other more accepted methods and a method we should not ignore. Now there WAS a caution not to let our personal computer blind us to what the market was telling us either. To be aware of and to avoid circular thinking where we sought to support our own preliminary results. Our computers also had bugs that could lead us astray if not carefully monitored.
But all this was back when an appraiser could write “derived by” (whatever it was derived by) coupled with ‘appraiser’s experience.’ Back when state regulators and federal GSEs understood and respected that appraisal was as much an art as a science; and appraisers were considered to be trained professionals engaged in that artful application of science…or was it a scientifically guided art?
But you see, now it HAS to be only a science. Otherwise AVMs and hybrids wont work. Systems like UAD and CU would have never been conceived if appraisal were still an art.
You see, while OUR computers have no problem with art. FNMAs and the powers that be have archaic computers that only think in zeroes and ones. VERY ‘scientific’.
PS-The Internal Revenue Service still uses these old style computers. Why they even figured out a way to use them for preliminary screening processes called the “smell test” which is applied BEFORE deciding which returns to audit. BEFORE scientific analyses or Legal aspects of tax code are applied.
An ordinary “Does it smell right?” question is asked.
in Pa, before certification, you had to be a real estate broker before you could appraise at minimum. every appraisal, i start like a r.e. broker knowing, of course, a buyer never buys like an appraisal being done. however, the 4th approach is my 1st approach, so i like this article. too many of the dope appraisers should have had 3 years of r.e. experience to even start understanding.
Tom on whole I agree R.E. sales experience is helpful; perhaps even necessary I sold in the wild and wooly days of 1971-1974; and again in 1984-1986. The challenge for an agent that becomes and appraiser though is to keep the agent side in perspective and follow appraisal standards rather than subjective or ambiguous agent gut-feelings.
Tom when I was first an agent in the ’70’s my market sfr predominant values were $25k to $27.5k and sellers and buyers would negotiate through their agents (face to face with sellers) for days over $250 in the SP. Most agents could ACCURATELY peg a likely sale price of a listing to within $500 about 90+% of the time just by walking past it while reading the mls. Some agents are still that ‘good’…but many more jus don’t have a clue.
That’s why WE (appraisers) have very specific standards & practices.
Tom – I disagree, sort of. If we have signed sales contract I would first assume that is THE markets reaction to the subject’s improvements at that time for the amenities offered there in. Then it become a feasibility test. Are there comparables out there with similar feature that are fetching similar prices. If there are none…the value is not there. It may be worth it to the buyer, but I can’t say the collateral is there for the loan.
I understand there are times Realtors have NO comparables to support listing prices they has set and sure enough there is an idiot that walks on the “lot” to buy at full or above asking. When I ask for support for the listing price, they say the don’t have any, but knew they could get the price and I should just do my job and make it work. With folks like this, they don’t have a clue what the purpose of an appraisal is – it’s not to biased towards their opinion of worth. I’m there to promote public trust and determine the market value. Value and worth at not interchangeable in most cases.
Some might call this so called “Fourth Approach” reconciliation, judgement and common sense. There are however other approaches to value besides the basic 3. This is not one of them. However, many appraisers do lack good judgement and common sense with regards to accuracy and are sometimes called form-fillers.