In the Eye of the Beholder

Real Estate Agent with Executive Realty Group 471-000119

Today's real estate marketplace is challenging some well-seasoned perceptions.   Think about one of the cliche's you grew up with ... "beauty is in the eye of the beholder".  Actually, from a real estate perspective the phrase is more aptly put "value is in the eye of the beholder".  Over the years you've probably seen some very clever "Your House as Seen By" messages.  They might have left you with an impression something like:

Here's Your House as Seen By .....

as seen by you     You

    Your Buyer     as seen by buyer

as seen by buyer    Your Lender 

    The Appraiser    as seen by appraiser

as seen by tax assessor   The Tax Assessor 

Today, however, it's getting harder and harder for the "beholder" to have even the foggiest clue as to what real value is.  Market value used to generally mean "what a ready, willing and able buyer, being under no undue pressure, is willing to pay, to a ready, willing, and able seller, under no undue pressure to sell."  And loosely, of course, if there is a mortgage involved, it also depends on what the buyer's lender's appraiser confirms it's worth. With current market conditions being so volatile in so many areas, "value" is now considered a "moving target".  To some degree, that's always been the case.  Today, however, that's particularly true.

Amidst claims of undue pressure placed on appraisers to determine "value" to meet or exceed a particular price, there are efforts under way to decontaminate the appraisal process.  In a recent post by Regina Brown, she explores how a New APPRAISAL law will affect every Realtor and Lender by May 1st!.  This new regulation approved by the Federal Housing Financing Committee (FHFC) outlines the Home Valuation Code of Conduct which defines what lenders, processors, underwriters, agents, and others can and cannot do relative to the appraisal process.

Despite the measures outlined in this action, however, it's important to understand that the appraisal process itself, though well intentioned, is inherantly flawed.  Though the appraiser (as well as the underwriter for the buyer's lender) has a critical level of influence over whether a loan is ultimately approved or not, we must not lose sight of the factors that color the appraiser's perceptions.  For example:

  • Though the appraiser does view the interior and exterior of the property being appraised, and takes measurements, photos, and notes about that property, that appraiser does not see the interior of the properties s/he uses as "comparables" in determining value.  Generally a "drive by" of the comparables is done with an exterior photo and observation of the comparable's "location", but they will not be able to observe the condition or floorplan of the comparable.  Even if they were to get inside those homes, however, they would not be observing it as it stood at its time of sale. 
  • Square footage is only part of the story.  Two homes could have identical square footage, but with one home being "functionally obsolete" because of its layout, while the other of the same size has broad, flexible appeal.  This can make a huge difference in the buyers' perception of value...after all, they're the ones who have to "live in the house"
  • There are factors that can make a huge difference on the salability of property that are often overlooked in appraisals.  For example, were there strong odors (cigarette smoke, pet urine odors, strong cooking odors, etc).  What about evidence of mold, damaged or stained flooring, severely uneven flooring?  These are the types of things that appraisers are not privy to ... and they can dramatically impact the sale prices of those comparable properties.
  • Particularly in a slower market, when there are vary few "good comparables" because few homes are selling, appraisers are forced to either draw comparables from outside the preferred target area or to take comparables that had sold much longer ago than desired.  The further away the property in time or distance, the more "ajustments" the appraiser must make to arrive at a value.  The more adjustments, the more room for error.
  • The appraiser generally will use comparables that are most similar in terms of size, type of layout (single story vs 2 story, for example) and also the type of sale ("normal" arms length transactions vs "distressed" sales such as foreclsores, short sales, etc).  Traditionally, when there are very few of these distressed sales, appraisers can bypass a "similar" property which was a distressed transaction because they have other comparables from which to draw.  However, when the market has large numbers of such distressed transactions, appraisers may be forced into including those properties in their evaluations, which can have a significant negative impact on the value of the subject property.  This calls into question the validity of comparing the motivation behind a transaction rather than simply the physical characteristics of the properties involved.
  • When the appraiser does his work, he begins with a copy of the sales contract on the subject property.  In other words, he beings with the end in mind!  He knows the contract price as well as any concessions being made by the seller.  If an appraisal were really to be totally objective and unbiased, the contract price and terms would be irrelevant.  Since, however, the appraiser knows what the buyer felt the property was worth, his job is more or less to "confirm" or not the buyer's determination. 
  • Many appraisers operate in very large geographic areas.  As such, they are very often quite unfamiliar with the nuances between neighborhoods that often determine why a buyer might select one area over another, even if the selected area is more expensive.  A "similarly sized' property in the less desirable area would then have a negative impact on the appraiser's perception of the value of the subject property.  In other words, sometimes they simply do not know what they do not know!

The appraisal process, in reality, is much more an "art" than a science (though appraisals by and large are weighted in the loan process as though they were, in fact, reliable science).  It's important to also understand that an appraisl is done to protect the lender's interest in the transacton.  After all, when a buyer invests 5% of a purchase price as his down payment, that means the lender/s risk is the other 95%.   Though in many parts of the country real estate contracts do not provide for specific action if the appraisal comes in lower than contract price, particularly in today's precarious markets, it's prudent to include some condition to the sales contract stipulating that the property must appraise at or above contract price.  This at least to some extent would open the door to some recourse in the event the appraisal came in low. 

It's also important to remember that, regardless of what value is attached to a property today, it's a safe bet that the value may well be something different 6 months from now.  It may be higher, it may be lower.  But whatever "number" is attached to a property, it's real value to the owner has other measures.  It's "home"; it's pride of ownership; it's a part of our American Dream.   And particularly now it's good to remember that real estate has historically been a wonderful long-term investment as well.


Re-Blogged 1 time:

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Kate Elim
Dockside Realty - Spotsylvania, VA
Realtor 540-226-1964, Selling Homes & Land a

Hi Judi...I am very glad I recently subscribed as I may well have missed this post.

You made some very important points regarding the appraisal process.  The one I have always questioned is the appraisers receiving a copy of the contract.  Everyone I ask always has an answer and yet it never seems quite right to me.

Knowing an area is very important.  We sometimes have appraisers that are not from our location and not familiar with waterfront properties.  There is a difference.

Thanks for covering this topic so well.


Dec 30, 2008 10:59 AM #1
Judi Bryan
Executive Realty Group - Bloomingdale, IL
Your Chicagoland Connection

Thank you, Kate.  I absolutely agree with you about the need for a contract (if we are to assume that an appraisal is a valid, empiracle assessment of value...and of course it's a stretch to say that!)  Over the years I've seen so many "fee appraisals" done on properties where the value bore no resemblance whatever to market value.  So if appraisals are so unreliable, why are they given so much inflexibility in a real transaction?  On the other hand, if appraisals are supposed to be so "reliable", why do appraisers need to see the contract?

Dec 30, 2008 11:08 AM #2
Edie Lomason
Michael Saunders & Company - Venice, FL


People can't afford to be appraisers anymore.  Appraisers are paid so little for each deal you just can't believe it.  Many of the big banks cut deals with the appraisal company to do all of their appraisals for $250/ea.  The appraiser doing the job gets only 40 to 60%, that is around $125.  They get blamed for more problems in deals than any other participant and they make the lease amount of money.  Maybe there is a correlation.

Dec 30, 2008 11:14 AM #3
Judi Bryan
Executive Realty Group - Bloomingdale, IL
Your Chicagoland Connection

Yes, Edie - I have a very close friend who's been an appraiser for about the past 10 years.  Though she still does some contract work, she's also looking for a "regular job".  I didn't address that particular aspect in what I wrote (not because I don't think it's important - I actually do - but because I didn't want to scare the consumer!)  My friend generally gets $150-175 for an appraisal these days...but when you consider the miles she has to drive and the hours she puts in on even the "simple" ones, she'd make more and have so much less stress at a basic clerical job.  When people talk about how much time it takes to "do an appraisal", rarely do they consider drive time, measurement time, walk-thru time (particularly if the owner is home) in addition to pulling of the comps and recording adjustments, and formalizing their report.  I often hear people throwing out estimates like 2-3 hours, when in reality I'd guess it's generally at least double that for the simple ones, and much more for the complicated ones.

Thanks for commenting!

Dec 30, 2008 11:33 AM #4
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Judi, this is an EXCELLENT post on the subject of appraisals. I do think getting a copy of the contract is like getting the answers on an exam. But if they are only getting that amount of money, they need all the help they can get. Appraisals take 6+ hours when done by my appraiser friends. They are very thorough. Love the updated photos of "Your House as Seen by..." 

I could go on and on about appraisal experiences, but long story short, it's an opinion that has great weight with banks. Great points about floor plan, condition, and knowing the nuances of a neighborhood.

Dec 30, 2008 12:46 PM #5
Regina P. Brown
MBA Broker Consultants - Carlsbad, CA
M.B.A., Broker, Instructor

Hi Judi, thanks for including a link to my blog!  Your article is very thorough and well-thought-out.  As you know, there is ONLY ONE true measure of value -- and that is the price that a willing and quaified buyer pays for it.  Everything else is merely an estimate.

Dec 30, 2008 03:45 PM #6
Ron Spanton
RE/MAX Real Estate Associates - Gilbertsville, KY
Kentucky Lake Area

Judi, really excellent. It's true as well here in Kentucky where we are required to give the appraiser a copy of the contract. So I don't really understand why the banks/lenders require and rely so much on the appraisal, except to have a scape goat if things go awry. I always put a contingent in the offer that the property must appraise for purchase price or more to safe guard my buyers. And it's funny... 99.9% of the time it comes within dollars of the offer. What a surprise.

But let's take it another step....What about the appraiser that becomes a real estate agent? Isn't that a conflict? Apparently the appraiser/real estate agent relationship is not a conflict in Kentucky. Other states?

Dec 31, 2008 09:18 AM #7
Judi Bryan
Executive Realty Group - Bloomingdale, IL
Your Chicagoland Connection

Sharon - I absolutely agree!  If appraisals are truly empiracly correct & reliable, when does the appriaser need a copy of the contract; if they are not, why do the banks treat them like "gospel"!  Thanks for your comment!

Regina - Thanks for stopping by, and for giving me such a great post TO include in my own!

Ron - No doubt you're right about scapegoating!  Appraisers are the least paid cog in the chain.  As far as appraisers being agents....I see no conflict there other than that such an agent has additional valuation credentials.  That is, of course, unless they are appraising the same property as they are involved with as an agent ... which I'm sure would be a severe conflict.

Dec 31, 2008 10:57 AM #8
Russel Ray, San Diego Business & Marketing Consultant & Photographer
Russel Ray - San Diego State University, CA

I've seen the original cartoon, and I think I know who still has it. I got it when I was a Realtor back in Texas in the late 1970s.

Best wishes for health, happiness, peace, and prosperity in 2009.

Jan 01, 2009 06:11 PM #9
Judi Bryan
Executive Realty Group - Bloomingdale, IL
Your Chicagoland Connection

Russell - Thanks for your comment.  I remember seeing such a graphic "way back when"...not sure of the year, and certainly have no way of knowing whether it was the "original" or not.  The concept certainly did make me smile, however. 

Jan 01, 2009 11:39 PM #10
Shelley Marshall
First Realty - Crossville, TN
(931) 200-2745, Tennessee

Thank you for sharing.

Happy New Year!

Jan 03, 2009 10:49 AM #11
Janice Roosevelt
Keller Williams Brandywine Valley - West Chester, PA
OICP ABR, ePRO,Ecobroker

Your graphics were sooooo compelling. Excellent post!

Jan 04, 2009 11:31 PM #12
Judi Bryan
Executive Realty Group - Bloomingdale, IL
Your Chicagoland Connection

Shelley - Thank you for commenting

Janice - Appreciate the comment! They kinda depict the "value" experience, right?

Jan 05, 2009 12:33 AM #13
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