This article is not about appraisers because many of them are now, at their own request, living like troglodytes, and they request no visitors. That’s because they are sane, and the rest of the world is going nuts, or the opposite is true. We don’t yet know which. In either event, the honest ones are all tucked away where the staff is instructed to please not open the door.
This article is about real estate appraisals. An appraisal is an opinion of value. But the appraisal can only make sense if you understand that it is made pursuant to a very rigid set of standards called the Uniform Standards of Professional Appraisal Practice (USPAP), and only for a specific purpose. If you do not understand the standards, or the limited purpose of the appraisal, the information may be more damaging than helpful. In the best of worlds, an appraisal is only one tool available to parties, realtors, and lenders, for making all-important decisions about what property is worth.
Here are examples from during the “Silly Years” and “After the Fall” to make my point:
In 2005, I assisted a bank in evaluating development loan requests. We made loans based on appraisals made by USPAP standards, on 50-foot wide inland lots in Okaloosa and Walton County, for more than $200,000 per lot. Today, those USPAP standards say the same lots are worth $20,000. Has the “value” of those lots changed that much, or were the original appraisals wrong, or are they wrong now? Or are they both wrong?
The answer is that both were right-but only according to USPAP standards. What was wrong then was my brain. I allowed appraisals, based on recent, comparable sales, to legitimize real estate decisions without ever once allowing good sense to intervene. USPAP did not take into account that there were thousands of absolutely the same lot, about to be dumped on the market at exactly the same time. Nowhere do the standards consider that the “comparable sales” were not to real consumers, but to “investors” who could never buy all of the lots each had committed to buy if called on to do so. Nor did the standards consider that the markets were flooded with artificial money that might vanish quicker than it appeared, making each of those “comparable sales” a mirage.
If any one of us filled our car’s tank and drove through the day, we’d be okay with that. But if the fuel gauge continued to read “full,” sooner or later we’d get suspicious. Like that fuel gauge, we all should have been far more questioning of appraisals. Like your Master Card, common sense is a good thing. Don’t leave home without it.
All of the above was yesterday. This article is presented not because of what we did wrong before, but because of what we do wrong now, and its effect on real people. Last week, I met a couple who literally had the investment of a lifetime-one acre of oak-covered waterfront, with a modern 4,500 square-foot home, paid for. Their children had gone, and they wanted to sell and live, partially, on the value of their investment. I know the property. Space and talent do not permit me to describe the degree to which this property is truly special. But their appraisal said the home was worth only one-third of its 2005 value and half what they believe its value is today. Should they sell now in this market? Can they sell now?
By USPAP standards, a market-comparison appraisal is based on comparable sales. Today’s sales are short-sales, foreclosures, and distressed sales. Since there are few, if any, true comparable arms-length sales, appraisers use what they have and try to adjust. The problem is that appraisers are shell-shocked. They’ve been blamed for the good-times and blamed for the bad (hence the earlier troglodyte thing). Even if there were comparable sales (called “comps”), USPAP is designed to standardize properties so their mortgages can be sold in multi-million dollar packages on Wall Street, not to determine or assign value to unique elements of value that distinguish one specific property from another.
Vacant lots, all in a row, may have easy comps. But once you add a house built with care and imagination by a great builder (and we have many), and you add landscaping, neighborhoods, school districts, covenants, amenities, aesthetics, and countless other considerations important to making property unique and livable, value becomes personal. If you are a purchaser who walks away from property that is perfect for you because you rely solely on an appraisal, you will have ignored the very things that make that property special. The seller who allows his price to be set only by an appraisal is likewise wrong.
My answer to the couple trying to sell their waterfront is if you sell now, sell the uniqueness of your property. Hopefully that uniqueness is obvious and your sale will be easy. Your property is being sold to someone who wants to live right here, for the same reasons you did when you came. It is not being sold on Wall Street to an investment portfolio that doesn’t know (or care) the difference between Pascagoula and Okaloosa. We need to teach the public that our homes are not a commodity to be dealt with like mass market widgets. Your home may be financed like a widget, and USPAP standards treat it as a widget. But Realtors are here to make sure your home is not marketed as a widget. Because we live here, we know that the real value of property is not that which makes it comparable with others, but that which makes it different.
When you cook, you’d never be a slave to the recipe. When you buy or sell, don’t be enslaved by the appraisal.
The professional Realtor in this market has more responsibility than ever to help the parties understand what an appraisal is, and what it is not.
Realtors, lenders, my friends in the appraisal industry, and one acerbically helpful title insurance lady, have all contributed thoughts to this article. I appreciate that, and I hope they find this article accurate and useful. I know they would not have helped if each of them did not share a sincere desire to serve the public honestly and well.