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.

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.

Originally Posted  THE APPRAISAL BUZZ

Dustin Harris is a successful, self-employed, residential real estate appraiser. He has been appraising for nearly two decades. He is the owner and President of Appraisal Precision and Consulting Group, Inc., and is a popular author, speaker and consultant. He also owns and operates The Appraiser Coach where he personally advises and mentors other appraisers helping them to also run successful appraisal companies and increase their net worth.   His free podcast can be listened to on iTunes and Stitcher.  He and his wife reside in Idaho with their four children.  He is helplessly addicted to Swedish Fish.  

34 thoughts on “An Appraisal is not THE Opinion of Value”

  1. Pingback: An Appraisal is not THE Opinion of Value | Appraisal Buzz

    1. Garland Tredway

      Yes I just appraised a home like this, the other appraiser called the construction a Q1, Really, Hardie plank, no porch, patios, garage, he compared the home to much superior homes & also added for the subject saying superior construction. Well he just got sanctioned for his 3rd time, lots of hours, appraising under an USAP appraiser for 3 weeks. OUCH. The state is also going to examine a sample of his files. He will probably loose his license. He appraises for this modular builder a lot & hits every number they want. I also came in around $125,000 under what he appraised.

    2. Scott Williams

      Interesting discussion. I have always felt that appraising is a humbling profession and that is one of its main attractions. It is the surprises that keep me interested. There is always more to learn. It is unfortunate that many recent trends in residential appraising have emphasized formulaic practice over considered professional judgment, not only in the preferred responses on the forms, but also the financial incentives to conform.

  2. The Spicy Italian

    Wow, that really IS rural. What I don’t understand is why have building costs suddenly gone up so much around the country? I am seeing that here in western NC as well. It does make the appraisal process more challenging. The spread you mention confirms it is truly a matter of opinion and sadly there are a multitude of methods to arrive at an adjustment or value conclusion because we were all taught differently (or not taught well). Sounds like you did your homework and that is all you can do sometimes. We have the motto “explain, explain, explain”. Sometimes that is all you can do.
    I always enjoy reading the comments that surely will follow trying to make you look bad, emphasis on trying (not succeeding – your thoughts always make sense). There certainly is a lot of EGO out there. Lighten up guys/gals. This is supposed to be fun.

  3. Nice article Dustin. I have been an appraiser since 1977 so let me assure you I have seen many changes in our professional practice. Based upon your comments regarding the phone call, at least the threat of future business appears to continue to subsiding. That certainly made it very hard for young appraisers who were not established to correctly get into this business and those that chose to conform to the unreasonable request appear to have been somewhat self removed by now anyway. I now spend 90% of my time working as a commercial appraiser reviewer and thoroughly enjoy seeing how different appraisers in many different areas of US perform this methodological task. I will only say that as my days go by I more and more find that appraisers are more willing today to hear differences of opinions and clarifications of methodology as long as you never discuss “their value” and that is why have greater success with my reviews. That being said, an appraiser’s value is somewhat like one’s children. Everyone loves to hear positives and at times that’s the best way to get other negative issues cleared in the best interest of one’s client. At least that is how it has worked best worked for me. Enjoy your day in Idaho as I plan to do the same in North Carolina.

  4. Good article Dustin, when that situation occurs with me prior to engagement I inform the client that there is no way my appraised value will be close to the builder’s cost and there are no modular sales in the area so expect large adjustments on Page 2. That given the additional fee that I would have to charge to do such an assignment, do you still wish for me to proceed. I would far rather tell my client the bad news up front than spend a day on the phone with a very disappointed client the following week.

  5. Modular homes are equal to stick built not manufactured homes. Modular has better quality control than stick built. I have studied them at the Univ Of Cincinnati seminar by Hank Leist. They are very well constructed. He spoke of a time while being delivered the truck ran off the road. They took it back to the factory , checked it and it had no fractures, it was fine. Lender would not lend on a modular years ago because the appraiser turned it down, so the builder did it himself , later they went to the bank and the same appraiser appraised with no problem,they then told him it was the Modular. I don’t use manufactured comps unless there is nothing else, they are not equal. Victory homes out of Canada has very high end modular homes , excellent plans.

      1. I have 20 years in the manufactured housing industry and two year as a past Vice President of the Foothills Chapter of the Manufactured Housing Institute in Raleigh. I served on the board for another four years after that. I have been an appraiser now for 13 years. I can tell you that there are more than a few basic difference between modular housing and manufactured housing. First of all you must determine whether it is an on frame modular or an off frame modular. On frame modular have more similarities to a manufactured house and their quality although superior to a manufactured house is inferior to that of an off frame modular. The appraiser should thoroughly analyze the construction quality as these dwellings can also be custom built and they do offer a wide range of options the same as site built custom homes. Personally I would never compare an off frame modular dwelling with a manufactured dwelling as you would be comparing apples to peanuts. I thoroughly understand rural appraisal as I work both the mountains of North Carolina and Southwest Virginia where some counties has 17 people per square mile. My question to you Dusty is, “Why would anybody want to buy or build a house that’s value is more than $100,000 less than it cost to built it”?

    1. Michael Morris

      “Modular homes are equal to stick built not manufactured homes. Modular has better quality control than stick built.”

      That’s simply a laughable as well as unsupported statement in 99% of residendial markets.

      And anyone that attempts to use “stick built” houses as comparables with EITHER modular or manufactured houses is begging for an appt. with the State Appraisal Board.

      Good luck with that as I’ve seen at least five caeses of exactly that come before our Board and every one of the appraisers got ACE hours and three lost their licenses.

      1. Simply laughable? You sure about that? Where is your data to back that up? Since when is “simply laughable” a statement that belongs anywhere in an appraisal report and even more so in the context of a state board review? Do you have data on amused audiences? Just saying. I very much hope the 5 cases you speak of were sanctioned based on the appraisers failure to research, analyze and conclude about the differences between the two types in terms of buyer perception and not based on a pre-conceived notion that the method is “laughable”. Sounds to me Dustin did exactly that, and so long as he doesn’t live in your state, ought to be just fine in a board review. IMHO – ha ha.

  6. Mary-Ann Robator

    I have a tendency to agree with Ed Morris, having toured a modular construction company and watched the process first-hand. They have come a long way. They can be very customized inside a nice dry environment, not exposed to the elements during construction, as opposed to a custom on-site stick built home. Or, they can be fairly plain Jane. That was indeed a challenging appraisal problem.

  7. A “good” appraisal in the eyes of lenders and consumers is often the one that hits the desired value mark. I think to the last blog title “A mile in his moccasins”. I don’t think lenders or consumers have a clue about the quantity and quality of data that we have to work with on a daily basis, or how the lender specific guidelines of acceptable support affect the contents of a report. If they had to produce an appraisal of their own, they might understand how two appraisers could be so far off from each other in terms of value opinion. A good reviewer will always consider if the opinion is supported by relevant fact and logic, not whether or not the value is “wrong”, as there really is no wrong, unless the appraiser failed to use relevant facts, recognized methods and logic. As appraisers, we all know a “good” appraisal is the one that was supported with overwhelming market data and the “bad” one was when we had little to work with. This case of yours might go down in the “bad” category, even though you went as far as you could in terms of research and method; so as far as being “bad”, its still as good as it gets. Its a tough road to appraise the rural ones and if reporting on the FNMA 1004, cert #4 is a question that I find myself asking myself often. Sure, any property can be appraised, but did that happen with ample data or not is another question and yet another opinion. The catch 22 is that the appraisals done with limited data are near to impossible to argue as “wrong”, which actually gives the appraiser more freedom to inject more opinion. The part where an appraiser can get in trouble is if they do not disclose the quantity and quality of data and the potential impact on the assignment results. Sometimes in these situations I will refuse the assignment outright or, disclose to the client the limited data prior to working up the report and then get their approval for the “limited” appraisal in writing. Almost always they just say to do the best I can. All said, at the end of the day I would ask myself if the value is credible or not. If not, the best thing to do is withdraw. I have an order in front of me now I am going to refuse based on the same scenario. I know this client will ask for additional comps after I submit the “best” ones, which will not be all that great in the first place. I find that sometimes its best to let their loan be their problem. IMHO – Haha.

  8. Dustin Harris

    Just to clarify, I am not commenting on the quality of a factory built home. Rather, it is about what a typical buyer in my market will pay for a modular. In general, they pay less than a site built and more than a manufactured home. An Appraiser’s job is to crunch the numbers and see how the market reacts to certain aspects of real estate.

  9. James V. Waldrep

    The difference of opinion can be explained as follows;
    The appraisal is a minor economic study of a single property or project in a specific market as of a specific date.
    Looking at the wide difference of opinion in economics , from those who have the most market data available, i.e.
    Federal Reserve, hedge funds,major banks., economics is not a precise science.
    The cumlative market data should support the valuation. The appraiser may have to elect a narrative format and complete more research
    to prove a credible report. The fee should be commensurate with the assignment.
    You should inform your client or past client of your work and the scope of the assignment.

  10. Not bad Dustin, I agree. My experience in manufactured and modular homes. Manufactured homes are the lowest quality, then modular, then stick built (in order by cost-in general). The question is, can you prove there is an adjustment between a modular home and a stick built home. This is where the work comes into play. I believe you can prove it. Just takes time and effort. Start with the cost breakdown. Good luck. An appraisal is an opinion of value, based on facts, no speculation.

  11. Dustin, despite the gratuitously and unnecessarily offensive intro, it sounds like you did the right thing. By the way, if it were not for your ‘avid readers’ you’d be writing memoirs rather than a blog.

    Surrogate pairing is comparatively commonplace where insufficient data exists in your own market area/ ‘neighborhood’. Heck, even IRS and courts recognize surrogates.

    Hopefully you are not just discovering this now.

    As for the lender and the builder, it seems like they simply don’t understand their own product and market position.

  12. Conclusions vary depending on adjustment method(s) used:
    1) TLAR
    2) SWAG
    3) PFA
    4) Dart Board
    5) Ouija Board
    6) That’s how I was taught!
    What’s your favorite method (grin)?
    Or, to quote Alonzo Harris: It’s not what you know; it’s what you can prove.

  13. Michael Morris

    An appraiser that accepts this sort of assignment must not have enough “good” work to do. After “paying my dues” for over 20 years appraising pretty much anything, I’m fortunate to have enough “good” clients with “good” work to not have to get invloved with nonsense like this. The amount of time involved with this sort of appraisal assignemnt is never compensated highly enough. I’ll pass.

    1. Maybe your reluctance to accept these complex types of assignments has a bearing on your expertise to judge their quality no?

    2. Maybe this is where the ‘ego’ Dustin mentioned comes in…
      I’m totally in agreement with Michael, Once I’d sufficiently proven to myself that I could do these “project” appraisals, I see no reason to engage in them unless I have nothing else to do. Its akin to pro-bono work because the compensation NEVER justifies the effort. I’ve been in this profession a fairly short 12 years and already I’m convincing myself to cut these convolutions down to no more than one a month…
      but that ego man, it gets the better of you 🙂

  14. Great article, Dustin. Our county assessor uses a 13-step quality rating system, with 7-Average in the middle. The majority of stick-built homes are 7, 8 or 9 (Avg, Good, Better) and higher end properties moving up the scale to Very Good, Excellent, Luxury & Mansion. Thirty years ago, everytime I saw a 6 (Low Average) it was a factory-built modular — and I never saw a modular rated any higher.
    Not so now! Many of the new, in-fill homes, either on never improved “passed over” lots or replacements for deteriorated or fire-destroyed homes are high quality modulars. The builder comes in with a snorkle truck to pour the concrete foundation (or basement), measurements are verified, then a few weeks later a crane is brought in and positioned and the next day a string of trucks arrive with the sections of the new home. When finished, they fit into the neighborhood and it is difficult to tell a modular from a stick-built. Twenty to 30 years ago I often used manufactured comps when appraising modulars because they were similar appearance and only need minor adjustment. With the new, high-quality modulars going into neighborhoods of $600,000 to $2 million homes, stick-builts are valid comparables.

  15. So, we have some varying opinions about the three types of homes, stick, modular and manufactured. I find the terms used to define them somewhat misleading. A stick home is actually site-built and a modular and manufactured are actually both built off-site in a factory; all of them are “stick-built”. In truth, a contemporary modular home is probably the highest quality in terms of workmanship. This is because these are most often built to meet or exceed local codes and the building environment is controlled and highly automated. The end result is a home that was built without the common site-specific troubles that often arise with a consistency that can not be matched from one crew of local workers to the next. Site-built homes have to work around the weather, the lack of jigs and the lack of large equipment that assists the workers to get the truly difficult things done. Manufactured homes, generally called mobile homes, are also built in a quality controlled environment, though are often built to lower standards than traditional homes. All said, I can write about these things all day until the cows come home and it makes no difference. The buyer perception I have found so far is that a stick-home is the best, a modular is second best and a manufactured is third best in terms of quality and subsequently prices paid. I am watching for that to change as modular homes become more commonplace and accepted in the market. Sounds like the builder and buyer in your case Dustin already are aware that a modular is superior, but are caught waiting for the rest of the market to catch up.

    1. Thanks for this comment. It’s alarming that so many appraisers are still not equating factory-built housing (modular, not manufactured) with site-built housing. As I watch the California wildfire neighborhoods being rebuilt with houses using both site-built and factory-built methods, it is so plain to see why factory-built can be the superior choice. I hope the market perception (and that of appraisers) catches up soon.

  16. I have had my own house appraised 3 or 4 times in the last couple years and it surprises me when I see adjustment made for thing that does not make any kind of sense at all.

    $1,000,000 property, bedrooms are adjusted at $5,000, bathroom at $5,000, Garage at $3,000, view $10,000, pool $10,000, lot at 2.00 per square foot. I think these appraisers just learned from their trainers about 15 years ago when these properties were selling at $200,000 to $250,000 and have never done any kind of marker survey from local brokers or done any paired matched analysis to see what really is the value of these adjustments. I am not surprised that values come at all over the place from low $800,000 to over a 1,000,000.

    1. I am curious if you are an appraiser or a consumer? You write like a consumer, so I will assume that the case. I would say to walk a mile in our moccasins. How do you know the adjustments are wrong? Would it shock you to know that often much of the data presented in an appraisal report has little or even no bearing on the final value opinion? Appraisals often report numerous methods that were developed during the process, though it is up to the appraiser to decide, or reconcile as it is termed, which, if any of the methods, or portions of methods, could be considered reliable. Making dollar adjustments on the sales grid is an example. The Cost Approach in a market value appraisal would be another. The Income Approach in a market where investors have numerous strategies and expectations might be another. The appraisal report is almost always a brief summary of the process and also was most often reported on a form created by the client for the appraisers use, not created by the appraiser for the clients use. If appraisers were allowed to report appraisal results as they saw fit for the situation, you would likely see a report that looked nothing like what you see on a mortgage appraisal report. The spread of value you report (20%) from $800k to $1000k is not even close to out of the ordinary for high-end properties, at least in the markets I work. If an appraiser came in at $900k, it would only be a 10% spread, which has always been the benchmark for an “accurate” appraisal. I write all of this because it touches on something that I have thought of much lately. Buyers and Sellers, Refinancers, Lenders, Realtors (though not as much realtors if they are honest) and unfortunately some appraisers too, have used the standard 1004 URAR mortgage form for so long, that many have begun to believe that property is in fact always bought and sold in terms of the items the form format presents. Dollar adjustments are the primary culprit. I have yet to see or hear of a buyer walking into a property with a sales grid and calculator and start crunching numbers. Just because the sales grid allows for an appraiser to adjust for items like living area, site size, or bedroom count, etc, (I believe there are 26 possible pre-formatted adjustments) it does not mean that buyers actually react to these items in any quantifiable way (though they certainly might). The is why you might see adjustments that you believe are wrong, because they in fact probably are. A good appraiser will identify the unreliability in those adjustments and not weigh them as heavily, or at all, in their final reconciliation of value. The thing to remember is a report is nothing more than a standardized format for support of the opinion of value, not a worksheet that the appraiser fills out to “calculate” the value (those sometimes that might happen). IMHO.

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