How Do Birmingham Home Appraisers Come Up With Value?
I’ve recently read in the news and seen people’s comments that question an appraiser’s influence on home values. In one recent congressional hearing a participant accused appraisers of being racist and holding down home values in predominantly black neighborhoods.
I also read comments from an individual that insinuated appraisers and lenders work together to influence values. Both of the comments could not be further from the truth.
Appraiser Ryan Lundquist addressed the racism issue very well in a recent blog post so I won’t rehash that. What I would like to do is discuss the general process involved in appraising a home and the standards that appraisers go by in performing their job to show you that appraisers do not have the power to set local house values.
Appraisers Have Standards
The Uniform Standards of Professional Appraisal Practice (USPAP) is a set of national Standards that establish
requirements for the development and reporting of home appraisals and other valuation practices. It was developed to help appraisers promote and preserve the public’s trust by establishing high standards and ethics of the profession.
There are various parts to USPAP but the one I would like to mention here is the Ethics Rule included in the Standards. The Ethics Rule section of USPAP includes important guidelines on how appraisers are to conduct business. Some of the requirements include the following:
An appraiser:
- must not perform an assignment with bias;
- must not advocate the cause or interest of any party or issue;
- must not accept an assignment that includes the reporting of predetermined opinions and conclusions;
- must not misrepresent his or her role when providing valuation services that are outside of appraisal practice;
- must not communicate assignment results with the intent to mislead or to defraud;
- must not use or communicate a report or assignment results known by the appraiser to be misleading or fraudulent;
- must not knowingly permit an employee or other person to communicate a report or assignment results that are misleading or fraudulent;
- must not use or rely on unsupported conclusions relating to characteristics such as race, color, religion, national origin, gender, marital status, familial status, age, receipt of public assistance income, handicap, or an unsupported conclusion that homogeneity of such characteristics is necessary to maximize value;
- must not engage in criminal conduct;
- must not willfully or knowingly violate the requirements of the RECORD KEEPING RULE; and
- must not perform an assignment in a grossly negligent manner.
It is important for the public to know the standards that appraisers must go by. If these standards are not met then an appraiser can lose their license
If appraisers were part of a plot to control property values it would take a concerted effort by a large number of appraisers as well as other parties involved including real estate agents and lenders. These professions are so highly regulated that it would be impossible to coordinate such efforts without someone finding out.
On one hand, you have ethical standards that appraisers are obligated to follow and on the other hand, you have specific methods and methodologies that appraisers are taught to use to develop value opinions. All of these methods use market data to arrive at an appraisal value, which leaves little room for the appraiser to set local home values.
Appraisals Reflect The Market
Appraising is not an exact science. It is not a math problem that only has one answer.
Because human beings and emotions are involved in the purchase of a house the real estate market will have variations. Appraisers are taught to observe and measure these variations and then to apply them to the home being appraised.
The three methods that appraisers use to measure value include the cost approach, the sales comparison approach, and the income approach. Each approach views value from a different perspective but they all use market data to arrive at an opinion of value.
The cost approach considers vacant land value as well as current construction costs. In addition, depreciation must be factored in for older homes.
The sales comparison approach is familiar to most people. Sales comparables (comps) that are similar to the subject property are analyzed and compared to arrive at a range of value.
If a property produces income from being rented then the income approach can be utilized to estimate the value as well. It is important to keep in mind that there must be adequate rental data available to effectively use this approach.
When these three approaches to value are performed correctly they provide a range of value that the appraiser uses to reconcile a final opinion of value. This is where an appraisers knowledge of the market and experience can help.
Within the range of value provided by all three approaches, an appraiser can reconcile at the low, middle, or top end of the range. The low end might reflect a slow market or bad condition of the subject property while the high end might reflect a hot market or superior quality and condition of the home.
It is important to keep in mind that appraisal values are driven by market data and not the personal feelings of the appraiser. Appraisers are also obligated to follow specific ethical guidelines in the development of their appraisals or, as I stated previously, they risk losing their license and livelihood.
Birmingham Home Appraisers Do No Set Home Values
The bottom line is that appraisers do not set home values. They are hired as disinterested third parties to provide an educated and unbiased opinion of value for banks and individuals so that they can make informed decisions about real estate. This value is based on market data rather than hunches or feelings and it is by no means set by the appraiser.
Question
Do you have any questions about the role appraisers play in the valuation process? If so leave a comment below and as always, thanks for reading.
Hi Tom,
In this current market, as of today, April 21, 2021, when buying new construction, in a great city with great schools, I realize that the mark up of new construction available homes is pretty significant, even if they don’t appraise for the listing price, they are getting it due to the low inventory, low rates, and high demand. However, can you advise, if a new construction home, that is also in a great city zip code, but the schools are zoned in a less than desirable zip code, if that new construction home could sell for a significantly higher than the appraisal cost report, or the comparison report, (maybe 18 – 20 percent higher) regardless of the appraised value?
I never like to make blanket statements because every area is different. With that being said, you are right that for the most part new construction homes are selling for more than they may appraise for due to recent increases in lumber prices. Appraising is a study of historical home sales, however, we do try to combine the recent closed sales with active and pending listings as well to try and get a more accurate idea of what is happening in the market. I can see where this would happen in various areas, however, it probably would not be to the extent it would in an area that may be in a superior school system. The construction costs of two identical houses are pretty much going to be the same, however, the one in a superior school system most likely will sell for more due to the school system because there may be more demand for the better school system. I would not be able to comment on how much difference there would be but it makes sense that there would be one. This is something that should be considered when deciding to build in different areas because you may not get the same return on your investment in all areas.
Thanks for the post Tom. I appreciate the mention also. I encounter the sentiment that appraisers are the ones who make prices go up or down, but the market is so much more complicated than that. If appraisals are of course, they can certainly help drive the market, but otherwise appraisers simply measure the market rather than make it move. They’re more like a ruler than a gas pedal or brake pedal.
Great points, Ryan. I like your analogy that appraisers are more like a ruler than gas or brake pedal.