Why the real estate appraisal is flawed, but why it’s the best we’ve got

Do you remember when you were in High School and completed the science experiments in school? Do you remember one of the most important concepts that your teacher told you?

The other week, I helped my daughter complete a science experiment. The goal was to test different sand barriers. We used real sand and we had one experiment where we used just sand. Next we used sand and between the sand we used short vegetation. Next we used sand and tall vegetation. Next we used sand and oil.

Here are all of the variables that we needed to keep the same. The strength of the blow dryer, the distance the blow dryer is located from the sand, the time the blow dryer was on and blowing on the sand, the depth of the sand and the distance of each object.

The first time, we messed up, because the blow dryer was not mounted at the correct distance and the fan speed was turn on high instead of medium. How in the world does this relate to a real estate appraisal?

A real estate appraiser is a scientific experiment. We try to isolated similarities and differences to determine your home value. This is the reason why a home value is so difficult to determine, but so easy to determine all at the same time. Let me break down a list of unknowns that may change the value at any single time in the process of determining the value of your home.

The motivation of the buyers and sellers in the market might influence the value of your home. One seller wants to sell his home today and is willing to reduce the price significantly, if he gets an opportunity. The other seller with almost the same home will not even consider dropping the price one more dollar and will walk away from the house before “giving his house away.” Do you see how this could have a big impact on the market?

The Realtors play a big role as to what you may purchase your home for. One Realtor needs to make a sale this month. They will do almost anything to meet this goal. If the Realtor does not make this sale, then his kids won’t get Christmas this year. Do you think this will make a difference in your home value?

The seller decides to use a discount broker. The discount broker is not willing to pay any more than 1% to sell your home. The Realtor has a choice to show a new buyer this home or a home that they will get higher commissions on. Which home do you think the Realtor will show to the seller? Do you think this will make a difference in your home value?

A major mining company just closed its doors. Half of the city was employed by this one employer. Now 20 homes in the same development just went up for sale today. Do you think this may influence the marketability of your home?

Look, I just listed four major situations that may influence the value of your home and I haven’t even begun to tell you about the appraisal yet. Here is what your real estate appraiser may look at.

The appraiser will look at these items.

Proximity to the subject: This is basically the distance the comparable sales are located from your home. What if you have similar homes across a major river that offers a completely different school district, but they are the best, most recent sales available. What if the appraiser can’t find similar homes within the market area? There’s only been two times in the entire ten years that I’ve been appraising that I found three comparable sales on the same street as the subject.

Concessions: What if your neighbor created a separate contract to place a new car in the deal at the closing of the home or how about a new boat. What about just a regular agreement where the seller agrees to pay up to $20,000 in closing costs and pre-paids? Could this influence the final value of your home?

Date of sale: when market values are going down at a rate of 12% per year, do you think your kitchen remodel will make a large difference in value? Every year, the value of your home may be going down at a rate of 24,000 to 20,000 per year. Do you think it might make a different if the appraiser goes outside your market area to find recent homes sales?

Location: Sometimes you can have homes in the same area that differ significantly in location. Some homes in the same area will be located on a dirt road vs. an asphalt road. Some buyers will never consider a dirt road, because they do not want to deal with the dust and dirt.

Some buyers will never deal with a busier street, because they don’t like the traffic noise. Some buyers will never consider buying next to a barking dog. Some seller’s home back to a railway, while other homes back to a lake.

The kicker is that all of these homes may be within two miles from one another. The other kicker is that the appraiser will not even consider a barking dog in the valuation and most likely may not consider the dirt road, unless it can be supported by strong market support. In 95% of the cases, it will not be.

Site: Site sizes vary. Some of the lot sizes are larger than others, but is that all? Some lots are smaller, but sit in part of a swamp. Some lots are larger, but ½ the lots will be rock or hills. Some buyers may only want lots with a hill in the back yard, because they want to set up an archery range, while the next buyer will want a level lot, so that they can easily build a shop. Other buyers will prefer trees while others can’t stand trees, especially if they lose their leaves in the fall.

Views: Will you pay $50,000 more for a view, if the home offers no yard and you are looking for a home with a yard for your kids to play in? Some views are obstructed by trees. Some views or obstructed by a street and other homes across the street. Some views are absolutely stunning, while others being advertised as views offer nothing more than a view of a tree.

Design: Some homes can offer the same design, but be significantly different. One home might have an open kitchen and small bedrooms. Other homes might have larger bedrooms and a small kitchen. Which you will you pick. Do you think the appraiser can analyze these types of details in the market? No they can’t. The best that they can do in most cases is to locate three bedroom homes with similar design.

Quality of construction: Many times you’ll find that many homes offer similar levels of construction, however in a diverse market area, construction is night and day. Some homes will offer similar square footage and quality stone and/or brick siding and offer a basic average quality home for the interior. Other homes will other the cheapest siding that they can buy (vinyl or t1-11) for the exterior siding and totally fix up the interior of the home with every upgrade and amenities imaginable. Which house offers better overall quality?

Conditions: Most of the homes are probably considered in average condition, but what about each and every home that the appraiser has not been in personally. What about animal smells and pee stained carpets. What about smoke stains and smoke smelled rooms. Do you think the appraiser has any idea about many of these items? Do you think that the Realtor will remember or even tell you about the mold issue of the last home that they were in, not likely?

So you see, just like a class room experiment, everything is changing and everything might influence the value, even if it an appraiser can’t prove it. But even if there is a lot that we can’t prove, here is what we can prove.

Comparing homes that sold in the past will allow as to determine what homes may sell for in the future. When looking at trends today, this will allow us to determine the home value for today and looking at listing and pending sales today, will tell us what the market will pay for a home today and this is the best evidence that we’ve got to determine the estimated value of your home.

Closed sales are better than listings, because this is the value that someone was willing to pay, while listings have not sold and do not have a buyer yet; however, listings will dictate the reasoning someone will use to purchase a home in a certain neighborhood. Major factors are sometimes difficult to prove, but minor factors will surely be impossible to prove, because they are simply not even in the database used by Realtors or appraisers.

So if you are looking for an exact value for any home improvement, get ready for a vague answer, because an appraiser would have to isolate everything listed above and more to determine this one simple question. When you deal with real estate values, you deal with probabilities and that’s about all you can get out of it. Regardless, of what the bank tells you, your neighbor tells you, and your Realtor tells you or even you real estate appraiser tells you. So this is why a real estate appraisal is flawed, but why it is the best that we’ve got.

So until everyone builds the exact same home, every person thinks the same, the interests rates remain the same everyday, everyone likes the same design of home, everyone likes the same site, and everyone wants the same quality than the real estate appraiser will be flawed, just like a science experiment gone bad.