Dear Monty: I am indirectly involved in real estate transactions. I work for a title company. I witness real estate transactions regularly failing for a variety of reasons. Appraisals are one of the leading causes. There should be a better method. Will there be a better process in the future?
Monty’s Answer: Your question requires a quick overview before answering. There are multiple approaches to determining value. Each method brings a different perspective to a home’s worth.
Blending the three techniques allows the appraiser to consider numerous viewpoints to make a conclusion. The issue with all appraisals is that they are subjective; it is just one opinion. The three approaches are:
Cost Approach: Replacement cost. Cost sets the upper limit of value.
Income Approach: Property can produce income. Use rental value.
Market Approach: For what price are similar homes selling?
If you are a seller trying to determine the value and hired 10 appraisers to view the home on the same day, there would likely be 10 different answers. Suppose there are 1,000 homogenous homes in the neighborhood. In that case, the difference between the high and low opinions will be within 5%. When communities are much smaller, properties are rural, or homes are unique and have been constructed in different eras, these and other factors will change the value range. The range of value in those neighborhoods could be 25% to 30% or greater.
Other Considerations
The factors named above are physical differences. These factors are opaque to different degrees: the experience of the appraiser, market conditions, the appraiser’s skill, an accepted offer, appraisal bias, buyer and seller motivation and more. The results are varied opinions.The appraisal sector of the real estate industry has developed its standards and protocols over many decades before the internet. Technology and innovation exploded with the expansion of the internet. This writer believes that had the technology existed before appraisal standards and protocols developed, the appraisal would be very different today.
What May Be Different?
Value range pricing, also known as market range pricing (MRP), is a more transparent pricing method. The signal it sends is that every home has a range, a known fact. Seller expectations ease, and buyers gain insight.Comparable selection would be in the same or contiguous blocks and would build algorithms to adjust the specific annual rate of appreciation in each block.
The appraiser’s job would entail physically inspecting each home and reporting with consistent standards. They would shift to engage with municipalities as consultants. For example, there are currently several methods to measure a house. And there may be better ways to determine size than square footage. Throwing every home into a bucket to average square footage costs is misleading because home construction costs vary considerably. A ranch home is more expensive to build than a two-story home. How about using volume? How about by weight? A 2,500-square-foot ranch home with a full basement weighs about 250 tons.
