Why can "values" differ?
Recent news coverage of appraisals has included often baseless complaints of racial bias being rampant in the appraisal industry (New York Times story: Widespread Racial Bias Found in Home Appraisals, Bloomberg: New Federal Data Shows the Home Appraisal Gap Is Getting Worse, Inman: Those claims of appraisal bias? Another study backs them up, NPR: How home appraisal methods can end up perpetuating racial inequality and The Real Deal: Appraisal gap worsened as racial disparity persists). These articles are designed to inflame more than inform. In an effort to inform the public as to what goes into value, this blog will address how the "value" of a home can change between two appraisals, an appraisal and an agent's comparative market analysis (CMA), an appraisal and an assessment, and an appraisal and an automated valuation model - and more importantly - why appraisals remain the gold standard (only legal definition of value) in the real estate industry for valuation.
Market Value - Fannie Mae Selling Guide B4-1.1-01
Market value is the most probable price that 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. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
buyer and seller are typically motivated;
both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
a reasonable time is allowed for exposure in the open market;
payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
This is THE definition of market value for all Conventional, FHA, USDA, VA loans. All other defintions of "value" assume a fundamentally different definition of "market." The definition above assumes a typically motivated and informed buyer and seller. Other definitions of value include:
Investor Value: This definition assumes that the buyer pool is compressed to only that of investors, who approach the asset with the intent to make a profit. While the "typical" market may expect their home to appreciate in value over time, the investor is attempting to maximize profits in a compressed time frame (typically approximately 6 months) and therefore this buyer is not "typically" motivated.
Disposition Value: This definition assumes that the property must be sold in a short time frame. This is most often used in foreclosure work, where the lender wants to know what price they can expect if they want to get the asset off of their books quickly. This is not a "typical" motivation.
Assessed Value: This valuation is based on information available to the assessor at a specific time, and then adjusted over time based on the market and new information. An assessment office may make an inspection of the property from the exterior on an annual basis to determine the condition of the property, however, a home can vary wildly from the exterior to the interior in condition. Most jurisdictions are allowed to perform a valuation every decade, and then make market adjustments to this in the intervening years. For these reasons, the assessed value of the property can vary in extremes from the market value of the home.
Comparative Market Analysis: A real estate agent performs this in pursuit of a possible listing with a client, or a possible offer being made. It is important to understand that agent's are not valuation professionals - they receive 0 hours of state-regulated education in home valuation. These can vary wildly from agent to agent depending on complexity. These carry no weight in a court of law.
Automated Valuation Model: This an artificial intelligence's best guess. Zillow and CoreLogic disclose their confidence score publicly (Zillow claims to be wrong by more than 14%, 50% of the time. CoreLogic gives a range of values on each property and a confidence score that the value falls in the range. Typically this range is so wide as to be equivalent to a 5 year old's chances of hitting the floor with a dart).
If two appraisers, using the same definition of value, appraise the same home on the same date, the two opinions of market value should be close to one another. However, because market value determination is in part science (living area, bed/bath count/amenity measurements are all fact-based determinations) and part art (what is the impact on value of a strange layout, color scheme, lot shape, etc) there is room for disagreement. This is why automated valuation models struggle with homes that have any unusual characteristics.
Nationwide, on all FHA resales after renovation, two appraisals are required, and for the most part these appraisals are in agreement. There have been no reports of market value disparity in these cases. A few cases (noted above in the links) have noted instances where there has been a disparity - and this should be concerning to the lender, borrower, sellers, and appraisers. These cases should be reviewed, and there is a well-established system for doing so.
If you believe that the appraisal you received on your home is biased or incompetent in any way, do the following:
Urge the lender to perform a "Reconsideration of Value," in which they challenge factual inaccuracies, and offer additional comparable sales for review.
Have the lender perform a review of the appraisal - hiring another appraiser to review the original and offer their determination of competency.
If there remain questions, turn the report in to the DPOR State Board of Appraisers with a detailed complaint as to why the appraisal is deficient.