Valuation in a Vacuum

Appraisals and market analyses can be two very different values. Appraisals look backwards and market analyses look present and forward.

An appraisal should be a relatively scientific valuation based on square footage, features, amenities, quality of construction.

A valuation provided by a Realtor typically takes into account those criteria listed above as well as other items that may play into the potential buyers’ (and sellers’) emotional valuations that cannot be easily or readily quantified. Aspects of this intrinsic valuation may include criteria such as a property’s proximity to amenities, views, the feel of the neighborhood and other intangibles that may be difficult to value.

For far more detailed analysis by one far more qualified than I, visit the Matrix, by Jonathan Miller. Pay particular attention to the post titled, “Appraisers: Relax, Everyone Already Knows the Number.

One thing that has always bothered me, and this is not intended to be an attack on appraisers – Why do appraisers need a copy of the Contract to Purchase prior to their doing their valuation?

As a Buyer and Seller, it is vital to know what an appraisal means and how it affects at what price you can buy or sell.

More here as well:

With a fluctuating market, increased inventory, and housing prices dropping in many areas, the association says, having an appraisal is critical and valuable information.

That appraisal you had six or seven months ago when you refinanced? Not so relevant now.

Update 07-21-2006: Interesting story from the WSJ with this graphic (permanent link here):
 Public Resources Images P1-Af294 Apprai 20060721185445

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  1. Jonathan Miller July 19, 2006 at 15:17

    The purchase contract is a USPAP (federal) requirement for us to obtain. We are obligated to obtain it because the contract contains information as to what conditions are attached to the sale. What condition will the house be in when delivered, ie is the electrical work underway to be completed, will a new kitchen be installed, will the asbestos issue be remediated and in what manner, etc. It also allows us to see who the parties are and compare to public record to alert the lender of possible flipping, etc. Its not really about knowing the price since I have rarely been accompanied by a real estate broker on a sale who hasn’t told the appraiser what the purchaser price is unless specifically told not to. They are trying to keep the sale going and anticipate any problems.

  2. Jonathan Miller July 19, 2006 at 15:20

    One other thing. Its a misconception that appraisers look historically only when estimating market value. We look at listing activity and how long they have been on the market, inventory available right now (competition), current contracts and submitted offers as well as the proverbial closed sales. For the most part, closed sales are the only element of this thats historical.

  3. Jim Duncan July 19, 2006 at 15:30

    Jonathan –

    Thank you so much for the clarifications.

    The perception is that the contract price impacts the appraisal in that if a house’s contract price is $200k, the appraised price has come in at either $200k or $200,500 … Things have moved so fast for the past several years that everybody has had difficulties keeping up with values.

    My understanding (now much greater, thanks to you) is that appraisers tend not to look at active or under contract comps.

  4. Matt July 19, 2006 at 21:12

    Jonathan Miller aptly covered the appropriateness/requirement of purchase contracts, as well as consideration of current supply/demand and pending contracts (which are often the best comps).

    Jim, I urge you to read the definition of Market Value which most appraisals report. The most widely-used definition is found at

    As you suggest, this is rarely the value that Realtors provide; unlike appraisers, they are not obligated to, and in most cases not qualified to do so. At any rate, this is the value that most appraisals (I would think nearly all residential appraisals) report.

    I’d be interested to know how a Realtor reports value based upon the “feel of a neighborhood” (perhaps using some sort of ranking system?), but proximity to amenities should certainly be considered by any appraiser reporting market value. In short though, the emotional, and seemingly qualitative aspects influencing market value of a home are, in fact, quantifiable. Think about it, it’s not so important why this or that home/neighbhorhood affects market participants in a certain way (either negatively or positively), the point is that it does. An astute appraiser, and presumably a Realtor, need only to identify HOW these emotional/qualitative features affect the property to truly report market value. Again, I refer you to the appraiser’s canon on market value. But really, the Realtor should be reporting the same “type” of market value. Of course there are other types of value, but the essence of market value should be the same across the board.

    Lastly, speaking to the age of the effective date of an appraisal, many lenders will accept a 6- or 7-month old appraisal for many types of property. The line is often drawn at 12 months, at which point a new appraisal must be requested.

  5. Jim Duncan July 19, 2006 at 22:09

    Matt –

    Firstly, thank you for the dressing-down and the education. 🙂 Second, this is one of the ways that I (and others, hopefully) learn.

    I think that the emotional value cannot be readily quantified. What is valuable to one buyer may not be as valuable to another – and as such, market value for that first buyer may be higher than the value perceived by the second buyer. I have always believed that market value is what a “ready, willing and able buyer” will pay. The value that the lender will readily lend, as determined by the appraiser, may be very different than the value perceived by the buyer.

    I didn’t intend for this to come off as an attack on appraisers. Really.

    I do disagree with the 12 month timeframe in this particular market. Values have changed so rapidly in the past three and six months that I do not think that an appraisal from 7 months ago accurately reflects today’s market value.

    And it sounds as if I need to earn my appraisers’ certification.

  6. Matt July 19, 2006 at 23:04

    No way man…you definitely didn’t come across as antagonistic to appraisers. Who cares if you did though?. Those guys are a shady bunch.

    Seriously though, the acceptance of a 5-,9-,11-month old appraisal is strictly a function of each lender’s regs…perhaps stemming from FIRREA rules. If appraisers, Realtors, and market participants all agree that a 7-month-old appraisal in a particular market is invalid due to market changes, it’s irrelevant to bankers (loan officers actually) as long as it is within the limits of the bank’s regs. In my limited experience, appraisals sometimes get transferred between lenders as long as the effective date of value is less than 12 months old. But in 100% of these occurrences, the subject is commercial real estate.


  7. Jim Duncan July 20, 2006 at 10:21

    RISMedia released this story today:

    Reports of all mortgage fraud nationwide have tripled since 2003 to nearly 22,000 last year, the FBI said.

    In the past five years, appraisal fraud has been involved in up to 40 percent of fraudulent mortgage reports, according to the Mortgage Asset Research Institute.

    this PDF details even more.

    I have never seen anything even remotely like this in my market – these sound like concerted efforts to defraud people and lenders.

    An appraiser may boost the value of a house to benefit the seller, mortgage broker and real estate agent, who all gain from the higher sales price.

    The victim is buyers, who may not realize they borrowed more than the house is worth until they try to sell or refinance.

    I would argue that everybody associated with this (except maybe the seller) loses. Those who make an effort to defraud ruin their integrity and credibility and impugn the integrity and professional perception of those who do their very best in an honest, open and professional manner.