Comments (scroll down to add your own):

1. Of course we also need to keep in mind the definition of market value, as used by the appraisers themselves (and included in the appraisal). Market value is:

   “The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

   1. buyer and seller are typically motivated
   2. both parties are well informed or well advised, and each acting in what he considers his own best interest
   3. a reasonable time is allowed for exposure in the market
   4. payment is made in terms of cash in US dollars or in terms of financial arrangements comparable thereto
   5. the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”

   So what does all that mean? The price someone is willing to pay and someone is willing to sell, IS the value on that specific date. It is not possible to set a value independent from the current purchase. People seem to think that the appraisal actually indicates what the property is worth, even if they weren’t even thinking about buying it, but that just isn’t the case. (And look, the definition doesn’t even mention comparable properties.) The problem (and I’m certainly not saying there isn’t one) is with the interpretation of the appraisal as a definitive estimate of value that is created in some vacuum without any consideration of the current purchase offer.

   OK, more discussion than you probably wanted!

   Comment by Jason — May 24th 2005 @ 8:49 am

2. Jason: Thanks for the comments — that’s great information to have.

   Given what you said, it’s not clear why appraisals are even necessary. If the agreed on sales price is, by definition, the market value, then what sense is there in paying an appraiser to come in and rubber stamp it? The problems that the article addressed would seemingly come into play if things like #2, #3 and #5 are not met. In such a case, an honest appraisal would be critical.

   And despite the fact that the definition doesn’t mention comparable sales, this doesn’t change the fact that appraisals are based on such comparisons (at least in my area).

   Comment by nickel — May 24th 2005 @ 9:28 am

3. You are absolutely correct about comparables. All appraisals are required to address the three standard methods of determining value: comparable recent sales, the income approach and the cost approach. (In residential appraisals, a summary report is often all that is required and so the income approach may be all but eliminated.) What I was pointing out was that even though the value is indicated as a result of recent sale prices for similar properties, doing so appears to contradict the stated definition of value! Kind of goofy, huh?

   As for the purpose of having an appraisal, it is in large part to document that items 1-5 are actually true, and if not, an explanation must be given. (for example, if you buy a house from your sick 110-year-old mother, then the sale is certainly not at arms length.) In addition, and it isn’t a very good answer, federal banking regulations require an appraisal in nearly all transactions (there are a few exceptions.) This requirement, part of FIREA (Financial Institution Recovery and Enforcement Act), was the result of the banking and S&L problems of the 1980’s when many banks failed because they lent money based on artificially inflated property values that had nothing to do with a “motivated and informed buyer and seller.”

   (Full disclosure: I am not an appriaser but I do work at a community bank. I remember when I was first hired I noticed that all of the appraisals came back at the same dollar amount as the purchase price. That’s when I started to realize the inherent limitations of an appraisal.)

   Comment by Jason — May 24th 2005 @ 9:46 am

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