How appraisers reconcile value

Curious about how appraisers reconcile value?

appraisers reconcile valueAfter completing a pre listing appraisal assignment recently the homeowner asked me a question. He was interested in how I came up with the value I did given the range that the sales provided.

Being able to explain the appraisal process to help inform and educate the public is one skill that they don’t tell you about when taking your basic appraisal courses.  Over the years this is a part of my job that I have come to enjoy.

I explained to him how appraisers reconcile value and the many factors that are taken into consideration. Today I’m going to share with you what I told him about everything that goes into reconciling a final opinion of value.

Some background

In case you’re not familiar with what happens prior to the reconciliation process I’ll give you a little background. During the appraisal process the appraiser will research local home sales that have occurred for homes that are similar to the property being appraised.

They will be the most recent and similar sales and listings available so that the value estimate will reflect what is happening in the market now. The appraiser will bracket the physical characteristics of the house in order to get a good snapshot of what other homes are selling for.

After the comps are chosen, adjustments will be made to the sales for differences between them and the subject property. Generally speaking, if a comparable is superior to the subject property a negative, or downward adjustment, will be made. So if the comp was 500 square feet bigger than the subject a negative adjustment would be made to reflect the value difference for the additional square footage. This adjustment is based on an analysis of the market and reflects what buyers are willing to pay for the extra square footage.

After adjustments are made for all value related differences, the sales will provide a range of value that the appraiser will then use to reconcile a final opinion of value. Where the appraiser decides to land within this range provided by the sales is based on several different criteria that I’ll describe to you below.

What is an appraisal reconciliation?

When appraisers reconcile value they look at several different criteria to determine where within the range their final opinion of value will fall. Keep in mind that we refer to the appraised value as our “opinion of value”. Even though it is our opinion, it is based on market data, experience, education, and knowledge of the area. This is why three different appraisers may come up with three different values. With that being said those values should be relatively close. So let’s take a look at the different criteria considered when appraisers reconcile value.

Temperature of the market- As you might expect, the temperature of the market is a measure of current demand and supply. A hot market typically reflects good demand with limited supply, with prices trending upward. A cold market would be just the opposite, what you might call a buyer’s market. We usually see a larger supply of homes with a limited amount of buyers.

If the property being appraised is in a hot market the appraiser might reconcile towards the upper end of the range because buyers would be more willing to pay a higher price since more buyers are fighting for a smaller supply of homes.

As you would expect, the lower end of the range might be reconciled in a cold or buyer’s market because there are more houses to choose from. A buyer would not pay a premium for a home if they had numerous other homes to choose from.

Condition of the home- During the reconciliation process the condition of your home is also taken into consideration. Buyers are more willing to pay a higher price for homes that have been well kept and/or have had updates and renovations.

Appraisers take into consideration a home’s effective age when reconciling value and updates and renovations help to lower this figure. In addition to a lower effective age, these improvements can increase the appeal of a house.

Improvements such as updated kitchens and bathrooms bring a premium and can help the appraiser support a value towards the upper end of the indicated value range. In addition to the big ticket items, small cosmetic improvements like fresh paint and crown molding can also add to the appeal of a home. It’s difficult to put an exact dollar amount on the added value these types of items provide but they can increase the marketability of your home which is a good thing.

Quality of construction- Appraisers attempt to match the quality of construction of the subject property with the comparables. Sometimes this is not possible on all comparables and there may be a difference in quality between the subject and sales.

Whenever the subject property is of high quality this is another way to compare the subject to the sales and to use it in the final value reconciliation. When all else is equal most buyers will typically choose the home that is better quality and may even pay more. By comparing the subjects quality to that of the comps the upper end of the value range may be reconciled. Of course the opposite is also true and a home of lesser quality may support a reconciliation at the lower end of the range.

As you can see, even after the appraiser has performed their market analysis in order to develop adjustments for the sales, the job of arriving at a final opinion of value is still not over. The appraiser must look at this range of value and determine what part of the range should be emphasized all while considering the physical attributes of the house as well as the temperature of the real estate market.

Question

Do you have anything else to add, or maybe another metric that should be considered when appraisers reconcile value? If so leave a comment below and let’s keep the conversation going. As always, thanks for reading.

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Comments

  1. Baggins says:

    Geesh, you’re so technical. I like the categorical placement consideration. I review the market data in detail with pre research, develop a logical conclusion regarding high/mid/low range price/value expectations, and then categorically place the subject home against that measure of comparison from the refined data set. mid/high, mid/low, etc. Easy to conceptualize, and does not blow their mind with the minutia of it all. Have year heard this appraisers joke? If in doubt, just WAG it. Wild Ass Guesses. Works every time. No not really, just kidding. Wags though, seriously I’m not joking. Yes I am joking, no not really. See how easy that is? I had an appraiser tell me he measures the market. I held up my tape measure against the skyline and said I just don’t understand how you do that effectively. LOL. Humans are the X factor in real property analysis. Which is why I find that logical inference and categorical placement are more effective tools to get your finger on the pulse of the market, as opposed to complex measurement approaches. If you’ve got a logical premise, the measurement is there somewhere, somehow. Proof it if you want, but that’s not always necessary.

  2. Thank you for explaining Tom. When I reconcile, my thoughts are, “What comparable sales needed the fewest adjustments and what comparable sales am I most confident in the adjustments?’ I might decide to give the most weight to one comparable that has a few more adjustments because it has a location, quality, view, or condition that did not require an adjustment (those tend to be more subjective adjustments than size or sale date).

    • Good points Gary. On occasion I will also go with the comp that required a little more adjustments but that I was more confident about. I think it’s situations like these that will prove that a live person appraising real estate is much more reliable than a machine. I think there will always be a need for our services.

  3. Nice job, Tom. I find it’s important to consider the temperature of the market. There is always a range of value. In an aggressive market, it may be more reasonable to reconcile the value toward the higher end of the range (especially if the property has upgrades an such). I’ll be curious to see the comments on this thread. This is an important topic.

    • Thanks Ryan. Value is rarely static and it’s important to take a temperature of what is happening in the market before arriving at our final opinion of value.

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  1. […] and including pictures of items that require repair will paint a better picture of the property. Appraisers reconcile the final value of the home after making adjustments to the sales used in the report. The final value […]

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