You are Not Valuing Property

What do you do for a living?

I am a real estate appraiser.

What does that mean?

I value real estate.

Actually, that is not quite true.  Okay, technically it is, but what is the value of real estate really?  Real estate is given a value only based on what a seller is willing to settle for and a buyer is willing to part with.  Of course, it is much more complicated than that (which is why appraisers are so needed), but that is the gist of it.

appraisedvalueFor a moment, I want you to think about the psychology of valuation.  We often look at our job as the process of looking at data, discovering trends, and interpreting what a house or property would likely sell for in the present market. If you Continued to read here, you will question, where does that value point come from?  Decisions.  Decisions of buyers and sellers in that marketplace.  Thousands and thousands of decisions determine value.

Appraisal is not so much about pinning a particular number on an address as much as it is about quantifying the decisions of buyers and sellers in a particular area.  Let me say that again.  The process of valuation is not about deciding the price a particular home will sell for, but rather studying the numbers behind how people react with their dollars to certain aspects of real estate.

Of course, everyone reacts differently to a given circumstance which is why appraisal is not an exact science.  You can never say that a deck is worth $2,000 all of the time in this area, because sometimes it is and sometimes it isn’t.  Some buyers will pay more or less for a particular item.  Some buyers will pay a given amount for an item on Wednesday and more for that same item on Friday.  This is one of the reasons true, paired-sales analysis does not exist.  About the only thing we can do is quantify how an average buyer might react to this item or that situation given enough data.

Why is this important?  It is wise to step back from the trees once in a while to observe the forest.  In our day to day of inspecting houses, finding comps, making adjustments, and reconciling data, it is easy to get caught up in process and forget what it is we are actually doing.  Appraisers do not determine value and appraisers are not deciding what a particular home will sell for.  Rather, we are more related to a social scientist than a Realtor®.  We see the decisions that others make in a marketplace and project that data (past performance) on our current assignment.

Knowing this information might also cause us to be a bit more humble in our station.  An appraiser has an important job, no doubt, but we are not the movers and shakers in a marketplace that some (mostly in the media) tend to think we are.  Whenever I see an article blaming the appraiser for high or low values, I have to chuckle just a bit.  They sure think we have a lot more power than we really do.

 

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.  

 

15 thoughts on “You are Not Valuing Property”

  1. Pingback: You are Not Valuing Property - Appraisal Buzz

    1. I so agree. Appraisers analyze and report market conditions based on the actions of buyers and sellers. If we are doing our jobs correctly we do not drive the market up or down.

  2. And here for 20+ years I thought I was valuing an “interest” in real estate. You know, like fee simple and leased fee.

    1. Nope. We are the economists that Dustin describes. Your understanding is the very common result of what we all have programmed to believe. I suspect it is the orientation of Fannie Mae and of course that GSE is ubiquitous, influential and also wrong.

      Good job Dustin!!!!!

  3. Thanks for sharing your insights and knowledge. I always learn something from your articles. On this one; it’s so true, others, especially realtors think we determine value. We don’t! The data does! I like how you put it: Appraisal is not so much about pinning a particular number on an address as much as it is about quantifying the decisions of buyers and sellers in a particular area.
    I guess I would not see appraisers as social scientists but maybe more like reporters – we report the market’s decisions.

  4. In the early 80’s when I entered the business, my first boss would tell us often that we were “the mirrors of the market” and I have always liked that analogy.

  5. When I started reading this, I thought you were going to say, “We are not appraisers, we are small business owners, entrepreneurs, and CEOs. We need to always be looking for opportunity to grow our business and that does not necessarily mean valuation.” I guess that could be a topic for a future post for the “Appraiser Coach”. 🙂

  6. Good article, but when you wrote “Rather, we are more related to a social scientist than a Realtor®. “, remember that many appraisers are “Realtors”, and not because we sell real estate, but because we have to join the association to access MLS. Using ‘real estate agent’ would be more accurate. But it isn’t just you, the National Association of Realtors is happy to take our money, but seems to forget that appraisers exist as members.

    1. Pam, have you contacted anyone at the Appraisal Division of NAR?
      MOST appraisers are unaware that they can not only become full blown Realtors in their own right (without being brokers); but that they can also seek to become designated appraisers through NAR. NAR offers the Residential Accredited Appraiser (RAA) and General Accredited Appraiser (GAA) designations. There is STILL a difference between a Realtor and a real estate agent. Appraiser Affiliate Membership in your local board does not make one a member of NAR. MY Board didn’t even know how to process my application to become a Realtor as an appraiser until NAR explained that (1) yes, it can be done, and (2) how to do it.
      NAR offers a host of data services that are useful to appraisers, beyond mls access. I also had to join CAR (California Association of Realtors) who ALSO offer more information to us.

      And last though certainly not least, if you are looking for someone to “do” something for appraisers contact Jan Bellas – National Membership Coordinator of the American Guild of Appraisers (AGA) at (301) 220-4100 and JOIN.

      As one of the guys directly responsible for ‘doing things’ for appraisers I can tell you that we DO get involved in our members problems; we appear before Federal Agencies and quasi fed organizations like TAF and our various state boards. We lobby for and against legislation affecting appraisers; and perhaps most importantly we DEFEND appraisers in trouble with THEIR state boards to the extent that defense is feasible. We have written Governors and State Board Regulators. We coordinate with State Coalitions where those coalitions are willing to join forces on specific issues.

      Call Jan, or give me a call. Mike Ford, CA AG, SCREA, AGA, GAA, RAA, Realtor(r) & Chairman National Appraiser Peer Review Committee of the AGA, OPEIU AFL-CIO. My personal number is (714) 366-9404.

  7. Coach,

    Actually you didn’t describe VALUE, you described the establishment of a price agreement and conveyance. Appraisers do apply value in an appraisal. What else is the purpose? You use a market and its price data to derive a VALUE. Albeit; the current definition of Market VALUE is arcane by today’s economic standards and creates more confusion than solution for the public and appraisers alike. The Rational Expectations theory (our current value definition) was developed in the early 1900’s. Modern economic theory handles not only rational transfers but also (and one could argue) the massive degree of irrational conveyances (especially in real estate of recent years). The main problem is that we as appraisers are trying to correlate rational and irrational conveyances into a market value with a definition that does not allow for this real world condition.

    1. Hi Eric,
      I respectfully disagree that market Value as traditionally used is arcane. Far too many AI members appear to have adopted the accounting industry’s fluid definitions of value; or fair value or fair market value. Its one thing to study purely hypothetical, or even theoretical value concepts but quite another to cross over into promotion of value concepts THAT ARE NOT USED by the majority of participants in the markets that WE deal in.

      Buyers and sellers of a small house or small apartment buildings do not have the same motivations & requirements; or use the value metrics of the hypothetical International Investment House buying ten thousand shares of a REIT. Attempting to make real estate appraisal definitions ‘fit’ CPAs or NACVA Business Enterprise Valuation definitions only adds to confusion in our profession at a time when we can least afford it. Is the AI NOW saying that its basic text on Real Estate Appraisal Editions 1 through 14 were wrong?

      You and I may use comparable sales data that is from one day to a couple years old in an extreme case. Business Valuators will use REIT transactions from up to twenty years ago to support a fair market value for today. They will often base their value premise on what they perceive “the market” SHOULD demand in a return rather than what it actually achieves. Its a house of cards…but they have all kinds of neat charts and graphs to ‘prove’ their theories; and the ‘blue smoke and chicken bones’ “valuation” methodologies.

      The AI does NOT do themselves or anyone else any good service by referring to themselves as ‘valuators’ now, rather than real estate appraisers.

    1. True.
      I think the more we try to be something that we are not, nor should we be; the greater the efforts are to make the public think we are highly sophisticated international economists. By the way, when’s the last time you knew of an economist that was right? I mean right , in advance. They ALL seem to have 20/20 hindsight.

  8. I had to re read your article before realizing what a great article it really is. I was still looking for you to remind us that we appraise varied interests in real estate rather than real estate itself. You were too subtle for me to see it on the first pass.

    “The process of valuation is not about deciding the price a particular home will sell for, but rather studying the numbers behind how people react with their dollars to certain aspects of real estate” EXCELLENT!

    When ever I am asked if I can appraise something and for what fee and turn time I immediately launch into my own twenty+- questions to try to determine or verify what the interest is that exists, and what the interest is that I am being asked to appraise. They are not necessarily the same. I think if all appraisers realized this and made this the first step in their process BEFORE accepting an assignment we’d see far fewer problems.

  9. This is a case of reality colliding with fantasy.

    You wrote: “Thousands and thousands of decisions determine value.”

    Really? Why is it, then, that many thousands of “decisions that determine value” always manage to conclude that the “value” of property is within +/- perhaps 2-5% of its sale price?

    Show me a single home under, say, $500k (and sold anywhere in the U.S.) such that its appraised value was 10-15+% higher than its sale price. They don’t exist. And I haven’t read a single concrete, well- reasoned answer explaining why that’s the case.

    Our markets aren’t that perfect.

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