Appraisals Should Report a Value Range Rather than a Single Point

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.

Conclusion

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 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.

Now, go create some value!

Dustin Harris is a multi-business owner, but he has found most of his success as a 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 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.   He and his wife reside in Idaho with their four children.

28 Comments on “Appraisals Should Report a Value Range Rather than a Single Point”

  1. Dustin,
    I appreciate your insights and this one is spot on! I’ve always felt that the value opinion is an estimate and should be expressed as a range. I would appreciate it if you could provide the generic comment you use when providing the value range in your addendum as I am considering adding this to my reports. Has including this commentary ever caused underwriting stipulations and if so what is the issue? Thanks!

  2. The problem with the industry is the choke hold that underwriters have on appraisers; we’re not much more than data collectors and form fillers. For the most part, appraisals are written for underwriters and reviewers…the last thing anyone needs are questions that require reopening a file.

    There isn’t an appraiser breathing that would disagree with this article, only the market – the buyer – establish true value. But that’s also value at that moment in time under those circumstances. Moving parts include buyer and seller motivation, circumstances of the sale, the local market…..who is to say that home under contract for 100K wouldn’t contract next week for 105K? Not an appraiser.

    As for inserting a range of value, I do exactly the same thing on every report. I’ll given them the “number” but in the addendum are words to the effect “…the local market is very fluid and there are a myriad of influences that have a direct impact on the value of a home…” I list the major ones and then say “….it is more reasonable to place the estimate market value of the subject in a range; in this case that range is X to Y.”.

    This conversation could last for hours because there are multiple reasons providing a range of value is much better than a single number. However, we all know that common sense has no business in this business….

  3. Stop whining, make a decision. Its not a fact, its an opinion, and picking a value says something. Stop being a pussy and pick a value from within the range and say why. Thats what you are being paid for.

  4. There you go trying to make sense out of appraising for secondary mortgage work. Of course you are correct from an appraisal perspective, but apparently the process is the borrower specifies how much is needed and the LO decides the loan amount before the apprasal is ordered.

    Lending is not about appraising and for what ever reasons appraisers have been reporting point values for a long, long time. So common is the is point value reporting that now we face being required to report an “accurate opinion”, which seems to be akin to predicting how much the subject will actually sell for in the future. The surprising thing is that the profession is just going along with that too.

    @g Funny. I hadn’t thought of the Navy Seal analogy of appraising.

  5. In many of my market areas the reconciliation of value is quite challenging as the Adjusted Sale Price of the comparable sales may still be all over the place even after all necessary adjustments are taken into consideration. I know averaging the ASPs is a big no no in arriving at one’s opinion of value so, I often use the statistical Mean of the two best comparable sales (usually the ones with the least net and/or gross adjustments) to arrive at my opinion of value. For those who’d like to use a range of value, I’d say: “The Adjusted Sale Price of the best available comparable sales range in value from X dollars to x dollars” in the Reconciliation.

  6. Another reason why the conventional lending industry should embrace the ERC methodology and even entertain re-writing the defintion of Market Value to something similar to ERC’s Anticipated Selling Price. There’s a REALISTIC reason most ERC companies require two appraisals and extend a buy out offer based on two appraisals that are within 5% of each other–THEY’RE ACTUALLY ON THE HOOK WITH THEIR and/or THEIR CLIENT’S MONEY. There’s accountability and consequences the conventional lenders never have or will have to deal with despite the token fines of late.

  7. I totally agree that appraising is not an exact science nor can it be. In the beginning it was considered to be an art but with the sophistication of appraisal techniques and tools it is now considered to be a “Scientific Art”.
    Let’s get real, the very essence of a bureaucrat, which category includes loan officers, processors and especially underwriters, is having not to make a decision, therefore, a range of values would never fly. Any real estate professional and most buyers and sellers can do this. Even discussing this is an exercise in futility. Besides if an appraiser cites a range of value i.e.; $29,000 -$39,000 the same argument can be used… maybe it will sell for 45,000?.
    If you really think about it, the value given in an appraisal should represent the opinion of the highest end of the range. What purpose would citing a lower end value serve? It’s common knowledge that any property can sell for less and as professionals I doubt that we want to be credited for an opinion as how little something can sell for?? .
    We continue to clamor for respect as professionals and then suggest methods and copouts which make us appear indecisive.
    Suppose you took your spouse to the doctor and he/she gave you a range of diagnoses between Alzheimers to AIDS? Doubt you would go back to this professional and the old joke is if you take your spouses home with this diagnosis it would be wise to drop them off a few blocks from home and if they found their way home don’t make love to them.-
    Edward Liggins

  8. Well said Dustin. Your comment about the “most probable price” really hits home. One other problem that I see it that we’re trying to extract the most probable price given that the buyer and seller are acting “prudently and knowledgeably” and that “both parties are well informed or well advised”. When is that the case? Only if they’ve done the amount of research we’ve done, which is – Never! We’re trying to pinpoint a tiny island in the Sea of Arbitrarity that’s in constant motion. The entire buying and selling process is based on irrational people thinking irrationally, and then we’re supposed to somehow put our finger on a point and say “Right there. That’s the value of the property”. If you’ve ever watched a football game, you’ll know what I’m talking about. After the player with the ball is tackled, the referee places the ball, not in the exact spot where it landed, but where his best estimation of where it should be is. Then, the chain gang (appraisers) come onto the field and try to measure to the exact inch the distance of a ball that was arbitrarily spotted to begin with. We’re measuring arbitrarily points placed by irrational people. Did I mention that I love my profession?

  9. I agree with “g.” Stay in your lane Dustin. Your opinion regarding what the lenders “should allow or should do” does not matter. Residential appraisal has ALWAYS been about providing a “point” value and not some generic sort of range “value”. You want to provide a “range of values”? Great, that is called Commercial Real Estate Appraisal. and BTW, the crappy appraisers that would be good with the “range of values” WOULD end up with nonsense like. My opinion of value for the subject property is $225,000 to $280,000, which does NOTHING for the lender.

  10. The problem with reporting a value range rather than a point value, is that lenders will PRESUME the lower end of the range to be the value on which LTV is based. How does this serve any consumer? Ranges sound nice in a discussion of appraisal theory, but in the sfr financing market they really have no place. I agree with “g”. We are paid to do a job. We are trained to do that job, and we should simply DO that job. If arguing the benefits for range values in your appraisal report makes you feel good, then by all means do so, but you still have to put a point specific value in it. Now you have TWO sets of numbers you have to defend and support to state regulators, if it ever comes to that. The ERC approach, or at least how the appraiser is rated using it is not the answer either. You are rated on your % variance from NET proceeds-not your actual value. You are expected to maintain no more than a 2.5% variance. My own averaged 1.75% which I attribute to both effort and extreme good fortune since none of us can reliably claim a degree of accuracy greater than 95% anyway.

  11. Interesting theory, all you have to do is change the definition of market value. It does say most probable price, not most probable prices. While there are a number of times I would have preferred to indicate a value range on a difficult property, most of the time I am comfortable relying on my research and valuation process to provide a single point value. At that though I recognize that a property could in fact sell for a few thousand less or more or than another appraiser would develop a different conclusion. I suppose that is why relocation companies obtain two or more appraisals and often average the two closest ones to develop an offer price to the person being relocated.

    Sad though that in your 20+ years of appraising you only feel that on fewer appraisals “than you can count on one hand” you are really really confident of the value conclusion. I do believe I would have left the business if I had such doubts about my abilities to provide a meaningful (or apparently in your opinion incorrect) work product.

  12. Though the form utilized for this assignment requires an exact, dollar-amount value, I estimate the true market value of the subject to be within a range from $ to $.

    No, I have never had even one complaint from any lender using the above statement.

    1. You’ve never had a complaint BECAUSE you provided a “point” value. Once you fill in the blank on a 1004 with an “point” opinion of value, THAT is the number everyone will use that sees that report.

      Caveating it with your “range” statement means NOTHING to any user of that report up to and including a court of law. Don’t believe me? Ask Ted Whitmer. If you dont know who he is, you are not a very astute appraiser.

  13. My 38 years in appraising would make me long in the tooth by most standards. However, I do remember taking classes from the old Society of Real Estate Appraisers in the 1970’s with discussions about a range versus single point value. The camels nose was stuck under the tent way back in the 1980s and slowly it kept putting one leg after another in the tent until HVCC when it became apparent that “appraisers” had lost control. Don’t think so?..well ask yourself who is in charge..the appraiser?…USPAP?..FIRREA?..Dodd-Frank? Fannie/Freddie?…CPFB?..FHA?….granted not a simple answer. Which is the appraiser to follow? Forunately, most of the lenders (underwrites, AMC’s, etc.) fall under FIRREA, which clearly states that if its a federally related transaction a licensed/certified appraiser must be used (trainees aside) for appraisals. Not all assignments require a single point value; nor do all require a range, but the appraiser, not an underwriter should be the one to make that decision. I also use to give a range of value back in the 1980’s when the term/form called a “drive by” became popular. Comically, the government has placed in the hands of appraisers the “nuclear option” so to speak. Frankly, it is surprising that more discussion hasn’t be made about licensed/certified appraisers putting down their foot, or standing up if you will, and simply say we will not accept single point values as a “given” if a range is more accurate; nor scope creep, and rediculous delivery dates and other silly lender, AMC, underwriters, etc. requests. (Strike is such an ugly word!) Who else would they get to do appraisals for federally related transactions? The housing market would grind to a halt within weeks and whatever federal agency wold no doubt take months to fix such an upheaval. The new term that appraisers should become familar with is AIR from Dodd-Frank–Appraiser Independence Regulations. Lenders just “may” learn to back off when this term is told to them. My company is mostly commercial, but we do several URAR per month, but I personally don’t do them anymore as I can’t stand the nick picking.

  14. It is obvious that there is no such thing as an “absolute” value that is being expressed by an opinion. What I use in the typical report reconciliation is the statement, “Based upon the preceding data, analysis, and professional appraisal experience, I believe the market value of the subject property has been REASONABLY supported at $xxxxxxxx. (Emphasis added)

    But this statement recognizes that the client expects and/or needs a specific number for a myriad of reasons, i.e. estate taxes, real estate assessment appeal, condemnation, marital dissolution, etc. Not all appraisals are performed for financing where the review appraiser and underwriting loan officers need and/or want a specific dollar amount. God forbid they should have to put themselves in the position of having to choose a specific number from a range!

    I have admitted under cross examination that different appraisers can come to different opinions of value on the same property but I believe that my value is correct and reasonable. If I’m pressed, I will state that I would have no argument with an appraiser that was 5% higher or lower than my opinion of market value–but beyond that I would state that they are falling outside of an area were “reasonable appraisers” can disagree. Juries are not stupid.

    1. “I will state that I would have no argument with an appraiser that was 5% higher or lower than my opinion of market value–but beyond that I would state that they are falling outside of an area were “reasonable appraisers” can disagreement”

      Just curious how 5% became your “magic number”?

      And a reasonable attorney should have asked that same question.

      Why not 2% or 3% or 6% or 7%? I’d be curious as to your “supporting” your 5% variance claim as “reasonable”

  15. “Gentlemen, what we have here is a failure to communicate”, to coin an old movie line from “Cool Hand Luke”. It seems like the more appraisers you have in one place the more opinions will be forthcoming. One thing is for sure, we shouldn’t have a problem with an “Opinion of Value” given we have no problems giving our opinions. There are good arguments here on both sides and all of it just proves that we, as appraisers, are never together as a group and that’s why we’ll never make any real progress in demanding respect for our profession. Everybody always thinks they have the best method and that if it’s not their way then it’s wrong. Have you ever noticed that the value has to bracket? You can’t appraise a property for more than the highest sale price no matter what the adjusted value indicates. Isn’t that in itself a range of values? I say that getting the definition of market value changed is the key to changing the industry as a whole, however, that would take a concentrated effort by appraisal organizations that really matter. I’ll not name them here but we all know who runs the show.

  16. Interesting article, and certainly very interesting responses (ouch). I’m glad I read through all the responses, there were some points that I hadn’t considered. And to “G” who has the testicals of a effen rat, if your going to talk like a telephone tough guy at least have the balls to back it up and not hide you effen pu$$y.

    1. Your language is offensive and very unprofessional. Do you need a dictionary for more words to express yourself?

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  19. Personally I would say appraising is a BS profession, LITERALLY. The only reason a bank may need a few is obviously for fraudulent reasons, otherwise let the buyers and sellers dictate the market. If someone wants a house bad enough they are willing to pay 3k or 4k more for it, just maybe that is what the market is demanding for that property. Maybe the similar house down the street smelled like a rotten corpse and sold below what it should have and now you are using that as a comparison…ha.. Complete BS, the whole appraisal process is a joke, along with the 3% standard commission each realtor makes. The approval process itself will weed out who can afford how much. Let market forces decide, not some guy who blows his load at comparing home prices for a living and claims it’s an art.

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