Thursday, September 28, 2023 | The Latest Buzz for the Appraisal Industry

Collaboration vs Confrontation

This article was first published in the latest edition of the Appraisal Buzz Magazine. Subscribe now to never miss an edition.

Certainly, a conflicted feeling exists when it comes to real estate agents and appraisers. Recently, I attended a networking event, hosted by a local real estate brokerage. Being as sociable as possible, I introduced myself to a few real estate agents in attendance. Most were kind and engaged in interesting conversations. Although unconfirmed, some agents appeared to be surprised and perhaps a bit perturbed by the mere presence of a real estate appraiser amidst a crowd of real estate agents. As the evening progressed, friendly banter revealed a bitter taste towards real estate appraisers who they blame for hampering market values.

Both real estate agents and appraisers are of high importance in the industry, and neither is more important than the other. Agents facilitate a complicated sales transaction which includes an analysis of the suggested list price. Appraisers demonstrate an ability to reconcile real estate values in a detailed report used to support a mortgage finance transaction. As each profession shares its similarities, their license requirements differ. The appraiser license is distinctly more difficult to obtain involving a lengthy apprenticeship. In the essence of license self-preservation, appraisers find themselves conservatively appraising homes. Since real estate agents’ duty is to their clients (primarily the seller), the emphasis is increasing values to satisfy their clients.

The protection of an agent’s license is irrelevant regarding valuation. On the other hand, the appraiser’s license is in jeopardy if the valuation is unreasonable. Agents and appraisers tend to quarrel when values are disputed. Who is to blame and what is at stake? Is the agent unrealistic or the appraiser too conservative? The agent must reopen negotiations and may lose the sale. The appraiser puts his license at risk if the value is too high and reviews are ordered. Agents can oversee the fact that appraiser’s licenses are on the line, and appraisers do not understand buyers’ reasons for inflated offers.

The problem lies herein. Let’s analyze this hypothetical condition in a neighborhood where sales are prevalent although inventory of fully renovated homes is limited. No fully renovated home has sold in the subject’s neighborhood in the past year. Values in the neighborhood currently top out at $500,000. Only one, fully renovated house is listed in the neighborhood for $550,000. A buyer makes a full price offer, and to the dismay of the real estate agents, the appraisal comes back at $500,000! Everyone questions the appraiser’s selection of comps. The appraiser adds a conservative canned comment; “A major increase in value is not justifiable due to the low inventory of similarly renovated homes. Sales are prevalent, and the use of sales from outside the neighborhood would result in questionable reconciliation.” How can the appraiser justify a valuation at $550,000 when there are sufficient sales in the neighborhood indicating its $500,000 valuation? Controversially, what incentives does the appraiser have to stretch the value and risk a review that could ultimately result in disciplinary action?

“Screech…. hit the brakes!” No wonder there is a confrontation. The appraiser completed his assignment, will get paid, and, thanks to Dodd Frank, will not hear a peep from the lender. That is all fine and dandy, but everyone else is miffed, and the appraiser DID NOT do anyone justice, including the lender, if the value is supported due to the superior quality/condition of the subject. No doubt this is a difficult appraisal, and perhaps the appraiser believes the house is worth $550,000 due to the extensive upgrades. Did the appraiser take the easy way out rather than fully research and document the accurate quality/condition and support a reasonable value? If the highest value in the subject’s immediate area is $500,000 but not renovated, did the appraiser adequately analyze the subject property? Was the value unreasonably low by not bracketing the quality/condition of the subject?

Values are to be based off what the market will bear, and market value is described as what someone is willing to offer. Real estate values increase due to limited competition, gentrification, and positive economic factors. Real estate agents see improving markets because they are in the trenches working directly with buyers and sellers. Real estate appraisers are somewhat removed from that equation, which is a good thing, as they need to be to give their fair and unbiased opinion. Yet the appraiser and agent find it hard to sympathize with each other’s position.

In this scenario, the disconnect took place when the appraiser neglected to give sufficient weight to the subject’s fully renovated condition and evaluate the sales from competing markets in similar condition. Adequately citing his rebuttal may have gotten his client off his tail, but everyone else is left in the fray.

Inventory must be considered as the limited supply and demand demonstrates market reactions for rising prices. The subject is unique as fully renovated homes are rare in this neighborhood, but is this the direction the market is moving? This sale could lead the way to increased values as the neighborhood benefits from future renovations. However, the appraiser has the challenge of rationalizing the use of competing markets as comparable. The real estate agent considered comparables from competing neighborhoods due to low inventory of renovated homes, and the buyer was willing to make a full price offer. However, the appraiser didn’t. Since sales are prevalent, the appraisal only included comparables from within the neighborhood, yet the recently sold homes are not the same quality/condition as the subject due to renovation. In a nutshell, the subject’s condition is superior to homes in the neighborhood and sales from competing neighborhoods should be considered. The final estimate of value supporting the sale price can lead to increasing values, but the appraiser must clearly and descriptively detail the reasoning behind the use of such comps. The appraiser should attempt to mitigate the lenders doubt at the first submission, rather than addressing lenders concerns upon revision requests. This will lead to a convincing and rational appraisal report. In this scenario, the appraiser would not be “pushing” a value if supported with sales from competing neighborhoods of similarly renovated homes.

Agents and Appraiser can stand together, unite and realize they each have challenges. A difficult appraisal is daunting, and agents can empathize with the appraisers just as they do their clients. Each profession together must learn when it is necessary to justify a reasonable sale price and when it is not supported. We are professionals, and we want the best for our industry and clients. Lenders can recognize increasing values, appraisers can justify gentrification, and agents can acknowledge perspective to curb confrontation. Optimal results manifest when real estate appraisers and agents collaborate.

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