Possible vs. Probable

Recently, there was a news story  out of Atlanta, highlighting an appraiser who had refused to ‘rubber-stamp’ a purchase price with an appraised value to match.  What followed was an increasingly disturbing trend to find another appraiser who would.  According to the story (which was full of holes and unknowns), the second appraiser ignored comps in the subject’s neighborhood and found sales in a superior location to help support the purchase price.  

appraiser businessThis situation was talked about on social media and a man who identified himself as a real estate agent commented, “The value is what the buyer is willing to pay.  The appraiser gets the contract and it is their job to find data to support whatever THE BUYER agreed to pay.”  Hmmm.  Why hire an appraiser in the first place then?  If this agent is correct (which he is obviously not), a buyer should be able to show the purchase contract to the bank and a loan should be issued on the spot.  

Though the agent’s shortsighted comment was blatant (frankly, I question the authenticity as it just seems so completely nuts to me), this kind of thinking is not isolated to a few individuals.  It is often played out as I speak with agents and homeowners, and it is not confined to purchases.  Many people mistakenly believe that value for a property is based on what an individual is willing to pay for it.  Market value, rather, is defined in part as, “…the most probable price which a property should bring in a competitive and open market” (Fannie Mae Selling Guide). In other words, an appraiser is looking at value from the standpoint of what the average buyer would most likely pay given current market conditions – not what a single or even a select few are willing to pay.  

What is possible, is not always what is probable.  A good way to look at this is not from the perspective of how high a price a property might sell for, but how low.  If you were a potential buyer, would you be willing to purchase the current house you live in for $1?  Of course you would.  Does that mean it is only worth a $1?  Of course not as you would be unwilling – as the owner – to sell for that price.  Likewise, you would likely be willing to sell your current residence for $10,000,000, but good luck finding a willing buyer at that price.  Value is not based off of what a single person is willing to pay, but rather what is MOST LIKELY given the law of substitution (a buyer’s agency to pick another, competitive property).  

This principle also plays out, not just with total property values, but with smaller components as well.  I work in a fairly rural area.  It is not uncommon to have a homeowner ask me, “I am thinking of building a shop on my property?  Will that bring my value up?” Well, in most cases the answer to that question is, “yes.”  However, it is very unlikely that the value gained by the shop will exceed the cost to build it.  That fact does not always dissuade them from forking out the cash to build their shop however (because the utility to them is high), but the typical buyer will not pay a dollar-for-dollar value increase because the ‘average buyer’ will fall somewhere in the continuum between the person who loves shops more than the house itself and one who despises shops and wishes they were all burned to the ground.  

Appraising is all about market conditions.  Market conditions are all about probabilities and not necessarily possibilities.  So no, it is not the appraiser’s job to find the comps to support whatever a single buyer is willing to pay.   

29 thoughts on “Possible vs. Probable”

  1. Pingback: Possible vs. Probable - Appraisal Buzz

  2. As the least paid person on any single transaction (agents, home inspector, loan officer, underwriter, AMC exec. etc.) its unfortunate that often times its the appraiser who must also be the educator. Since the petitions in early 2008/2009, court transcripts (New York versus eAppraiseIT (Washington Mutual), and countless other times appraisers have offered the truth, its meaningless as no one cares (its ignored). Why is Wells Fargo suddenly under the microscope for a few million fake accounts while their owned AMC (RELS – since sold 50% at 50+ million) was left to hide the facts and collect hundreds of dollars a pop on millions of appraisals (2008/09 +)? Why was the practice and the truth ignored? Why do lenders need to hold weekend conferences in get away locations to discuss the health of the appraisal profession? Are they ignoring the truth (higher liability, lower pay, scope creep, AMC involvement, TRID (predetermined fees), etc., to focus on lowering standards (AQB board) to increase the supply (shortage)? Do they know its not a license issue? Per the Collateral Underwriter the powers that be have the ability to specifically know how many individuals are completing appraisal work versus the total number of licensed (hint is about 50% of total licenses). If 50% are choosing not to practice (see reasons above), why not address their reasons so the fake issue (shortage) can be addressed both short term (no wait to get licensed), and long term (actual issues solved)? Dustin, your blog brings up a legitimate ongoing issue, however the REAL issue involves the FAILURE of many parties (lenders, regulators, FDIC, Treasury Dept., AI, individual states, etc., to listen to those who speak the truth. Seek it.

  3. As I see it, appraisers don’t determine the value, they just report it. It’s the comparable sales that determine the value. Why else does the report have to provide comps? And those sales, with consideration to active listings, reflect current market conditions.

  4. I would like to know if that appraiser was disciplined in Atlanta and who turned him in. He should have been disciplined. However, I’m sure the lender wouldn’t have done it since they shopped for another appraiser.

  5. The realtors standard statement is that fair market value is a willing buyer and seller and whatever they agree to… My standard answer to that is that you are right… It works every time it’s tried right up to the point that you want to use someone else’s money. Now we have a different set of rules. Your willing buyer and seller can do any thing they want with their own money. If your “willing buyer” is ready to write a check, you don’t need me or the appraisal I produce. If they need a loan then it’s a different game entirely.

  6. I wish I had a dollar for every time I heard a Realtor or Mortgage Broker say those exact words. I have a standard phrase that I offer to them. “I’m sorry but you’re wrong. The value is exactly what they ARE paying….Not what someone may have offered in a sales agreement”.

  7. It is important to remember that “value” is an opinion, and “price” is a fact. People tend to forget there is a difference. When two people agree on a price and the transaction happens with their own money – no lender involved – people seem to forget that the price that was paid might very well not be consistent with the definition of the “opinion of market value.” It is a difficult concept to grasp. Realtors are advocates for their clients where appraisers are not. The key is to put the definition of market value first. People must put aside their personal belief – that what one seller and purchaser agree one is what a property is worth – because it does not have anything to do with the definition of the opinion of market value. Remember, everything is based on an equivalent cash price – so if one particular buyer, for some reason really wants a particular property, and the opinion of market value is not what the seller is asking, then if that buyer really wants that property, and the seller is not willing to lower the asking price, then the buyer has every right to still purchase that property – they just have to put down more cash to close the transaction.

  8. I’ve seen this time and time again in the Charlotte area. Appraisers going well outside the neighborhood to find any sales that support the contract price..smh..I do review work and am amazed that some of these clowns have a license…

  9. Common problem. It is important however to analize the specific market. Including lack of relevant sales in the immediate neighborhood that support if thats the primary issue. If one finds in a baseline search; same street same subdivision that the most probable price although slighty dated are higher and support. Then add these comps starting at 4 if over a year and explain what you do. Just because there is no sales to support in these cases is not enough. You must also explain why. That becomes transparent. And we find gives the readers enough data to duplicate your efforts. Support for your analysis is always best. Not just because I said so. Also give the realtors the opportunity to provide data. This also lets them know what your up against. And they may have additional data on the lower sales that might have not been disclosed or overlooked. Treat others as you would yourself. By the way in this OPINION based profession we always recommend and would welcome 2 opionions.

  10. Agents drive me nuts. I know. I am one (as well as a Certified Appraiser). Just like any other industry, there are good agents/brokers and there are poor ones. The one you referenced that made that comment is obviously the latter. Unfortunately, I fear that your audience here are a bunch of decent appraisers and no change will come of this. Here’s the real question: How can the real estate community better educate their brokers and agents?? Until the real estate community addresses this question, we will continue to see arrogant and misinformed responses from uneducated agent you mentioned. Would it be too unreasonable for the real estate community to start requiring 2-year degrees like we did for appraisers? Or would it be too unreasonable to implement mandated Appraiser education during the real estate principles courses and CE?? I think this discussion needs to be had, but it needs to be had in the real estate community. Here in the appraiser community, it just frustrates us and we complain, but no changes will be made.

  11. Common problem. It is important however to analize the specific market. Including lack of relevant sales in the immediate neighborhood that support, if thats the primary issue. However If one finds in a baseline search; same street, or same subdivision that the most probable price are higher, although dated and do support. Then simply add these comps starting as Comp-4 if over a year. Then explain what you do. Just because there is no sales to support in these cases is not enough. You must also explain why including trends. Then your work becomes transparent. Giving readers enough data to duplicate your efforts to support for your analysis and conclusion is always best. Also give the realtors the opportunity to provide data. This allows them to know what your up against. And they may have additional data on the lower sales that might have not been disclosed or overlooked. Treat others as you would yourself. By the way in this OPINION based profession we always recommend and would welcome two separate supported opionions.

  12. Let me be the devils advocate here. A buyer pays $300,000 for a property. The appraiser inspects the property and determines that the market value based on recent comps should be $280,000. The buyer decides he wants to purchase the property for $300,000 in spite of the appraised value. He is putting 50% down on the property so he doesn’t need a higher value for mortgage purposes. His parents live next door and he is willing to overpay for the property. My point is, this $300,000 sale (not appraised market value) will then be used as a comp for the next appraisal done in this particular neighborhood. Maybe appraisers should not be using sale prices of a property to determine market value. Maybe they should be using the appraised value of recent sales. Of course, the appraiser needs access to the appraised values of all sales.

    1. Perhaps the answer to address such issues John would be to make it mandatory to disclose what the appraised value was. Agents input the final sales price, closing costs, and often times other relevant information, so why not discuss the topic of the appraisal? Its no secret that the LO’s, agents, borrowers, etc. share the information, so is it illegal to have the listing agent only put in the appraised number? Truth be told, there would never be a push to disclose this known information, as higher sales prices mean more money for the agents. Seek the truth.

    2. Paul Herrington

      The key point is “he is willing to overpay for the property”. The sale will be used as a comp, but a competent appraiser will verify the sale with an attorney or RE agent and in the course of that verification should find out that the parents lived next door. The appraiser may not find out that the AV was $280,000 but they will at least know that there was a possibility/probability of overpayment, and adjust accordingly or give the sale less weight when reconciling.

  13. I have heard from many agents [some very seasoned] on many occasions that the market value is “what the buyer is willing to pay”. We all know that is incorrect. Verification is the key to using sales as comps, and asking the right questions. , ie. buyer and seller motivations, concessions, etc., and hoping for the correct info.

  14. People confuse the words “Market Value”, “Fair Market Value”, and “Sale Price” and forget that the circumstances of any individual transaction are compared against the Market Value definition – Basically,, each acting in their own best interest with no undue influences/conditions on the open market with effective purchasing power.

    I tell people to think of Market Value as the weighted average between all probable buyers/sellers, and the actual transaction is only ONE of the probabilities. If the other conditions of the transaction conform to the requirements within the MV definition, and no adjustments are warranted, then it MAY present the best comparable to use in reconciling the final value.

    However, if it’s a valid sale otherwise, the direction of the market AFTER the “meeting of the minds” must taken into account (since the appraisal will always be done after the property is in contract with an agreed sales price.)

    Also, one must be aware of it the “Contract Price” presented is AFTER the inspection and any adjustments for As Is, etc. and proper adjustments are included. Many times you get the first accepted price BEFORE the condition inspection that is typically occurring at the same time as the appraisal… or many times AFTERWARDS, since the banks want to take AS LITTLE TIME AS POSSIBLE to get buyers to agree on a loan that may be one of the most important and/or largest financial decisions of their lifetimes.

  15. Bill,

    FYI; on a positive note, Wells Fargo is calling seasoned Appraisers for assignments from their internal Appraisal Desk. I was called and I provided fees that were customary and reasonable, and told that would be acceptable and if you find a time consuming assignment (our term in NC vs complicated assignment), they would be happy to negotiate the fee. I believe they have been mandated to clean up their act (about time). We will see. If you have not gotten this call, you and others should contact Wells and pursue their new list of approved Appraisers.

    Regarding the silly Realtor statement; most people are uninformed about market value and need our unbiased opinion. One contract does not indicate market value. Showing my age but market value used to be defined as the “highest price” vs the “most probable price”. Glad that USPAP definition is gone.


    1. In my area of San Diego and zip codes of practice (average $900,000 to $2 million), the fees are LESS THAN $300. In the past they have also routinely offered desk reviews for $45. If one area has home prices in the $250,000 range and a much lower cost of living (Appraisal Fees $400 to $500), how can $300 be reasonable compensation when the COL is twice as high. It depends on your area Cory.

  16. Final comment;

    The underlying concept of any opinion of value is based on the Law of Substitution. ALWAYS consider what a typical Buyer of the subject would substitute for the subject property if it were not available. This will always keep you out of trouble. It may or may not be in the same neighborhood or zip code. A Buyer in my area seeking a house with a deepwater boatslip may search 20 miles north and south for this property. That is the “neighborhood” for the subject.

  17. In a financed transaction the sales price is what a purchaser is willing to borrow not pay. Rates are low right now. The mid-2000’s are trying to be recreated by agents. If they don’t have comps to support their sales price why would they think we do? Stick to your guns.

  18. Whenever I see situations like you have described in Atlanta, I am reminded of the change in the definition of value back in 89 or in that time frame of FIRREA. It used to be “the highest and most probable………”. Highest was dropped from the definition. What is also noteworthy is that lowest was not added which is what I have to occasionally remind a reviewer or underwriter.

  19. I just declined an order a few days ago for this reason. I didn’t feel like getting in the middle of an agent/appraiser feud. I was ready to accept the order but then saw the notes which read something like this: AMC, “….did you want an appraisal review or a full appraisal”. Lender, “No we had an appraisal and it was all wrong and the review was no help either. We need to start all over with a different appraiser.” Obviously the appraiser didn’t hit the number and someone is pissed. This stuff is going on all over. It’s always been this way but now appraisers are more sensitive to it since there tends to be more liabilities than in the past.

  20. Pingback: Possible vs. Probable - Appraisal Buzz

  21. I am both a Realtor and an appraiser. I don’t doubt that the real estate sales agent told the appraiser that the home is “worth whatever the buyer will pay”. That’s a common response we get from uneducated sales agents. Some just don’t understand the subject of substitution, but would like the world to think that values are continually in flux due to buyer sentiment. Values may be in flux, but I think it has more to do with total market sentiment than one individual agent’s and/or buyer’s opinion.
    The concept of “shopping the appraisal” is of course not new. As a Realtor, I sold a home to a buyer several years ago. When he decided to sell a couple of years ago, he used an agent that had helped him sell his last house instead of contacting me. I was a little upset. I had after all, gone above and beyond for the client in finding the home initially. When I saw the listing price of his home, being an appraiser, told him that I thought it was a little overpriced. He laughed and said his real estate agent knew what he was doing.
    Several weeks later I spoke with the seller, and he noted that they were in contract for around list price, but they were having trouble getting the home appraised. They had already completed two appraisals, neither of which had come in at contract value. I told him that was unethical, and he should consider that if both appraisers were low, maybe his price was too high. He went on to order two additional appraisals, the fourth one coming in at contract value. This man was an engineer, so I posed a question: Do you think it’s more likely that 3 appraisers are wrong and one is right, or that you just found someone who didn’t care about the factual statistics of local sales and “hit the value”? He told me to mind my own business, and went on to close the sale for the higher price.
    Now, I consider myself an ethical appraiser. I don’t even open up the sales contract until after the rest of the report is completed, so as to not let the contract value inadvertently influence my comp selection. How is it that, with today’s rules and regulations, this guy can order four appraisals on the same home? I am still dumbfounded by the ability of the lender to influence the neighborhood values through appraisal manipulation. Many of us may have similar stories, but how does this still happen? “Hitting the number” was supposed to be harder with the new regulations, but it’s obvious that it still goes on. This is yet another example of why our industry is faltering.

  22. Our broker friends are correct when they repeat that a property is worth what a buyer will pay for it. However, for some inexplicable reason, they do not understand that this logic, while it applies singly to a single property, a single buyer, and a single seller, carrying out a single transaction, does not necessarily reflect what the market thinks of that property. We are not brokers, thus do not think as they do. We are analysts. We consider the entire market, all of its components, all of the sales, current contracts, current listings, pending sales, and so forth, then we deduce from all of that data what is likely “…the most probable price…”. G.B. Shaw once opined that the British and the Americans were one people separated by a common language. We appraisers and the brokers have separated ourselves via our language. We both use the term “market value”. But the brokers use it to mean what a buyer will pay for a property. We use it properly to mean what the market, a collective concept, would likely pay for it. Our emphasis is on the analysis of the entire market. Their emphasis is on getting one property sold. Unfortunately, there is no common ground. Since there are more of them than of us, I fear our rivalry will not complete in our favor. Too bad the lending industry wants a number that earns them the highest commissions, not a well-formed opinion of what the property is worth.

  23. Just another day in the game. Appraisers are tasked with making the call, meaning refining the probable range to a single number, not unlike an umpire in sports. If you disrespect the umpire in sports you get ejected from the game. If only we were respected in such a way.

    I agree with Dustin’s last comments and always reference market conditions myself when considering where I will make the call. Do I go low, high, in the middle? The direction of the market helps me determine what I believe is most appropriate.

    Sales contracts are to be analyzed by appraisers per USPAP and in my opinion, there is exactly nothing unethical or in violation of USPAP if an appraiser so happens to agree with the contract price as a final reconciliation. After all, the sales contract is current and subject-specific, which is more than can be said about any of the comps.

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