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Appraisals and BPOs - Myths and Legends

Written by Posted On Sunday, 27 December 2015 17:24
Sunset Cape Coral Sunset Cape Coral

I'm often asked how I determine the value of a house, if I use a formula or a secret book of appraiser adjustments.  The reality is there is no set formula or book although I have seen adjustment lists based on sale price.  These are misleading at best.

Myth#1 - Appraisers have to use sales within one mile of the property to be appraised.

Not true.

The Uniform Standards of Professional Appraisal Practice does not address distance.  This can be a lender requirement, but most companies have modified this requirement to require one or two sales within one mile, and an explanation if this guideline is exceeded. There are many neighborhoods in my area of 5-6 square miles with relatively uniform development and no or little locational differences.  I routinely exceed one mile in these areas in order to include the most similar properties in my reports.  In other neighborhoods, a distance of one quarter mile can make a dramatic difference in sale prices.  Rather than distance, a knowledge of the local market and the forces at work in that market should be the greatest concern.

Myth#2 - Appraisers have a list of adjustments for features and amenities

Not true.

There is no list, book, or magic formula for determining adjustments or values.  There are some pre printed lists for making adjustments, based on the sale price of the property, floating around. This is at the very least misleading if not criminal.

For example, consider two houses that sell for $100,000, both 1,800 square feet living area, no garage, no pool.  One is a two year old house in suburbia with a land value of $10,000.  This house sells for $50 per square foot once the land is subtracted.  The second house is thirty years old and located close to downtown, with a land value of $50,000.  This house sells for $28 per square foot once the land is subtracted.

Sale Price                                         $100,000                                   $100,000

Land Value                                       $10,000                                     $50,000

House Value                                     $90,000                                     $50,000

House Sold Price/Sq. Ft.                     $50/sq. ft.                                  $28/sq. ft. (rounded)

Although these properties sold for the same price, the sold price per sf of the first house is nearly twice that of the second house once the land is removed.  Adjusting these two properties for say, living area, at a pre set amount based on the sale price just doesn't make sense no matter how you look at it.

There are many ways to calculate adjustments using market data and costs. Each adjustment is unique to the property being adjusted and should never, ever be based on the sale price alone.

Myth#3 - My buyer's offer is market value.

Maybe, maybe not.

The most frequently used definition of market value is printed in the major appraisal forms used by lenders, and is defined as the most probable price a property will bring in an open and competitive market, with the buyer and seller being typically motivated and informed, and acting in their own best interest.

As any agent knows, buyers will perceive a property in different ways.  A feature one buyer loves will be hated by another.  These preferences are reflected in their purchase offers, and a listing may receive multiple offers for different prices.  So a property may have multiple market values depending on which offer is accepted by the seller.  Some listings are priced low for a quick sale, usually reflected in the listing's days on market. Sellers may accept a lower cash offer to avoid the pitfalls of financing. All of these items must be considered when developing an opinion of market value.

Against this background variability the appraiser has to determine which sale is most reflective of the subject property. So while a purchase offer can be useful in reconciling the appraiser's opinion of value within a range of comparable sales it does not necessarily represent market value.

Determining a list price for a house or an opinion of market value for a mortgage requires an understanding of the market forces at work with a neighborhood and community, and the ability to identify and quantify the impact of those forces on a particular house or property. There is no secret price per square foot value or formula, just strong math skills and persistence.

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Terry Caldwell

Owner/Appraiser at Caldwell Valuation Services

RD6870 CertRes

caldwellvaluations.com

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