When I use the expression, I am usually trying to explain the results of an appraisal. Unfortunately for our industry, we are often required to form an opinion of value, by reconciling a wide range of data into a single number. My problem with the process is that I don’t believe any one property is worth a single dollar amount! If we are talking Market Value, which is what most appraisals are completed to estimate, we are talking about what a knowledgeable buyer is willing to pay, and a knowledgeable seller is willing to accept, under no duress, in terms of cash or equivalent to. In a market of 200 potential home buyers, with 100 potential homes for sale, it is a safe assumption that there would be at least 2 purchasers interested in any given property. Now, those are loose numbers and completely hypothetical, but bear with me. If two different purchasers are willing to buy a home with an asking price of $200,000, one is willing to pay $195,000 and the other $198,000, which one becomes market value? The higher, because that’s what the seller accepts, right? What if buyer 1 had an agent that found it quicker and the seller never got the offer of the higher amount? What if buyer 2 had some sort of contingency, and the seller took a couple thousand dollars less because they didn’t want the risk of waiting? Does that make them unknowledgeable or unwilling? Nope.
In comes the appraiser. The appraiser does his/her thing, looks at the property, looks at 5 comparable sales, makes the necessary adjustments, (if you don’t understand this process I will explain it in another post) and sees a range of value between $194,000 and $200,000. That’s not a bad range in our part of the world, trust me! Yes, there are ways that we are taught to reconcile a value from within this range. But, is it appropriate? Shouldn’t the answer to the problem be the property is worth $194,000 to $200,000? A 3% range in value. More than likely though, the appraisal will say $195,000 because that’s what the sales price is.
Appraisers seem reluctant to indicate a value higher than the contract price, because if we have a willing buyer and a willing seller, that must be the value, right? This is why it’s important that we know if there are legitimate reasons the sales price may be below market; because yes, it happens. But more to the point, this is why I wish we were allowed to give a small range of value in an appraisal. What if buyer 2 came first? The sales price of $198,000 would be at the top of the range, but it’s supported.
Does this mean an appraiser should just trend their opinion of value to the upper end of the range? The MOST a buyer is willing to pay, because that’s obviously what the seller would accept? In the case of this example; maybe. But I can tell you that not all, or even most appraisals work out like this. Often times the range of value is 10%, 15%, even 20%+ variance. This is when a good, experienced appraiser is necessary to reconcile the differences, and make a logical, well supported estimate based on the best information available. I would argue though that allowing appraisers to refine that value to a 3% range, heck even a 1% range in some instances would be appropriate.