Dear Monty: Are Real Estate Appraisals Flawed?
by Richard Montgomery
Are real estate appraisals flawed?
Reader Question: Why do appraisals use comparative analysis as a means for valuing a home? This approach is flawed as most of the time they do not take into consideration the upgrades one has made in their home, plus the layout of the yard and landscaping that enhances one’s home. Why don’t they use a replacement value calculation to determine what it would take to replicate a house? That would give a better indication of the value of a home together with all the other intangibles. Once you have this number, then a comparative analysis could be used to see why a difference exist.
Monty’s Answer: Real estate agents, not appraisers, are the group that utilizes comparables almost exclusively when valuing a home. A real estate agent provides a document called a competitive market analysis (CMA) or some similar title.
The Competitive Market Analysis
The agent’s methodology rarely considers value adjustments between the subject of the property against the differences in the features of the comparables. As you suggest, the agent’s approach is flawed. There are two primary reasons the competitive market analysis is the agents’ tool of choice; agents lack specialized training, and they cannot invest the time required to meet all the requirements of a real appraisal. After all, their work product is free. Here is a link comparing them at http://bit.ly/2M8EEAs.
The Real Estate Appraisal
On the other hand, in addition to the comparative property approach, real estate appraisers do consider replacement cost in the evaluation process. Appraisers also include the income approach when there is an established rental market in the area from which they can gather rental data. The appraiser does take the points you mention into consideration. For example, the appraiser must drive to each comparable. They must make cost adjustments between each comparables features against the subject property. Each of the three exercises will result in different valuations. The appraiser must consider the influence of each activity in weighing their final value conclusion. The entire process requires considerably more education, time, and effort.
Both Work Products Are An Opinion
Experience, education, and logic are the key ingredients in determining value. What makes the task difficult is the marketplace. The marketplace ultimately decides property worth, and it can be different from an agent or an appraiser’s conclusion. Here is a link to learn to challenge an appraiser’s opinion at http://bit.ly/2hPEqkF.
Richard Montgomery is the author of “House Money – An Insider’s Secrets to Saving Thousands When You Buy or Sell a Home.” He advocates industry reform and offers readers unbiased real estate advice. Follow him on Twitter @dearmonty, or find him at DearMonty.com