Episode #526 – Is an appraisal better than a real estate agent estimate?

So a common misperception is that an “appraisal” is some sort of government-approved certification of value.  Even the appraisal itself states that its an “opinion of value”.  As most real estate agents have found out, appraisal values are not necessarily market values.  What this means is that an appraised value might be so high no person would buy a house for that price, or its so low, people would be willing to pay much more.

Here are a couple examples of how appraisals were way off actual market value.

During the boom of bank-owned homes in Las Vegas, the banks would get both an appraisal of a foreclosure, as well as a real estate agent’s Broker Price Opinion, also called a BPO.  The asset manager would then decide based on those which one to use for the listing price.

One home, a 2,000 sf home built in the early 70s with a pool was appraised at $117,000, despite my BPO value being $140,000.  It was a crazy low appraisal in my opinion, because it was the largest home in the neighborhood, had a pool, and had been worth $350,000 at the top of the market.  Even though it backed up to a major road, it would have been a good investment property or owner-occupant one as well.

When the listing agreement came in at $117,000 I complained to the asset manager that it was way too low.  She didn’t care and just said that my BPO value was too high and it would hurt my score with them when the sale price was much less.  I even told the asset manager that I could buy it myself at that price because it was so low.

Anyway I put the home on the market and we got 7 cash offers within the first 24 hours.  I called the asset manager and let her know and she told me to go back and get the “highest and best” from each buyer.  In doing so, I also let them all know that there were 7 cash offers, and that the list price was well below my BPO value of $140,000.   After getting all the buyers to raise their bid for the home, the asset manager accepted the highest offer, an all-cash deal for $140,000.

Exactly what my Broker Price Opinion said the house would sell for.

Appraisals are not perfect

So why was the appraiser so far off?  Because he was looking at homes that were 30% smaller, without pools, and then making virtually no upward correction to the value for the larger home size and pool.  As a real estate agent, we are well aware how precious every square foot is, and that a pool is a sought after commodity in Las Vegas.  Additionally, appraisers search for comparable properties differently than agents.  Appraisers search based on the tax data and go and find other similar homes in the area.  Real estate agents search as if they are looking for a home with a prospective buyer, so we look at it like the market looks at it, while the appraiser looks at the house more like the tax assessor looks at the house.

Another example was an appraisal of a bank owned home in a guard gated luxury neighborhood in Las Vegas that a year previously would have sold for $1M, which was the last sale in that subdivision, but in the preceding 12 months, value had plummeted, and the only other comparable properties were listings that were between $620,000 and $670,000.  Because you could not go and buy a home for under $700k that had just been bough a year previously for $1M I recommended a list price of $650,000 in my Broker price opinion, while the appraiser recommended a $1M list price.  When I got the listing agreement I called the asset manager and she explained that the $1M was the appraisal value and they had to use that.  I explained that there were 3 listings under $700k and no way we would get any offers.

As it turns out after 60 days of exactly zero showings, I talked to the appraiser who said they “were required” to use the last available sale in the subdivision as the primary comparable, even though it was a year old.  He told me on the phone “I can’t ignore that sale.  After speaking with the asset manager again, I was able to get a price reduction from $1M down to $635,000.  Within a few weeks we had 3 showings, and one offer for $620,000 which was accepted by the bank.

In that case, the appraisal was backward-looking, meaning looking at the value of the homes historically.  I was looking forward as a real estate agent the same way a buyer would.  Why pay $1M for a house when there are 3 very similar ones in the $600k range.  One approach is a technical approach, while the real estate approach is a market value approach.

The same thing can happen in a rising market, where appraisers won’t care that there were 10 offers all over list price, they only look at what similar homes sold for 3 months previously, and not really look at current list prices or the offer on the table between the seller and the buyer.  Understandably, the appraiser is an army length look at value, and serves an important purpose, but in many cases, it is not what a person would actually be willing to pay.

A better model than doing appraisals for an accurate home value would be to use a What’s My Home Worth app like Homing In, gather 5 or more independent real estate agents who are not involved in the transaction, and then take the median or average value and use it along with the appraisal.  Real estate agents are usually very happy to provide an estimate of value, as long as they have some pictures to look at to make adjustments based on condition and finishes of the home.

The wisdom of the crowd would reign over merely an estimate  of value based on one person, and even better most likely, since you could measure the performance of agents providing home values to see which ones did the best jobs over all, which were high on home values, and which ones were lower.

While most lending institutions won’t use Broker Price Opinions for lending purposes, many times they will use the BPO for things like estimated foreclosure price, listing price the same way a home seller uses a real estate agent Comparable Market Analysis.  Certainly at $300-$1,000 an appraisal depending on the market, its more cost-efficient and potentially just as accurate to just ask an agent what they think a home is worth.

But if you are trying to get a loan, establish a value for some current or future legal proceeding, you had better get that appraisal from a license appraiser, but be aware that just because the appraiser’s opinion is one thing, doesn’t mean a buyer is going to be willing to pay that price, and the new buyer certainly won’t be able to use that appraisal to secure their loan.