Here’s where your example diverges from my suggestion. The appraiser should not provide a single value. He should provide a range to the confidence interval requested by the bank.
For example: “I have 95% confidence that the market value of this house is between $750k and $1.08m”
Now, the bank, which knows about the bid, can either decide that, hey, it’s pretty close, and maybe this is one of those special 5% of markets where the market’s moving faster than the appraiser’s model.
Or maybe the appraiser is more cautious and knows that markets can move, and so he gives a wider bound of $700k to $1.3m. I don’t actually know what the bound will be.
But I do know that if you take a mathematical model and apply it to a bunch of house sales and then compare it to what the houses actually sell for, you can determine very quickly whether the model is any good. If your model requires inputting the offer in order to confirm the offer, you’ll basically never have any idea if the model has any predictive power at all, because anyone can come up with the right answer when they know it in advance.
Obviously, we can’t really know, because you just made it up. Presumably we’d find out in 30 years when the loan is paid off or earlier when the buyer defaults and the house is foreclosed upon and sold.
It sounds like the crux of your argument is “there is not enough current data available to make a reasonable estimation of market value without knowing the offer”. That may be true. If it is, what good is an appraisal? If the point of an appraisal is to protect the bank by stopping loans made with unreasonable offers and there’s no way to tell what an unreasonable offer is, let’s just try reading tea leaves.
I don’t think that’s true. I think that there is a way to determine whether an offer is reasonable. We just don’t use it.
I am not an appraiser, but I work with many, and do a similar job, although my job is less exacting (I don’t really care what the property should sell for, I just want to sell it). The bank can’t much use a range; they need an absolute number so they can compare it with the offer they are considering for financing. Banks can’t say, “That looks about right,” they have to say yes or no. I suspect that internally they have some leeway, but not much.
The appraisals I have seen do indeed indicate a range, but they also show from one to three values, and specify how those values were arrived at (comparable sales, reconstruction costs, or income potential). For comparable sales, they may arrive at multiple values, starting with a different comp and adjusting each. They also indicate which of those calculating processes (comps, reconstruction, etc.) they consider to be the best indicator of actual value in this particular case.
Appraisers who work for governments to provide an assessed value also have to come up with a single number for tax purposes. Sure, if pressed, they will roll out their calculations and show a range, but a single number is what the government must have as a final figure even if it was arrived at by subjective opinion.
How would this solve the problem? I think most lay people could value a home in a range of $600k. Most could probably drive by the house at 35mph and guess a range of $700k to $1.3M.
I generally agree with your assertion that the current model is bogus and that there certainly could be a 95% confidence model, but this range seems so out there as to be equally meaningless.
Also, if the bank can determine that this is a greater than 5% market, then why can’t a professional appraiser also know that and plug it into a model?
That’s sort of my point. I don’t believe that appraisers add much value. The fact that it’s hard to evaluate property without knowing the offer means that you can’t really test whether an offer is good. The fact that appraisers add very little value is masked by the fact that they get to know what value they’re trying to hit.
I could be wrong. But we’ll never know unless we force appraisers to prove that they can actually do so.
Presumably they could. Again, my range was just an example; maybe appraisers could establish much tighter bounds in reality. Although I’m not sure what good that would do. As we’ve seen over the past decade, a quickly growing market can easily turn into a quickly falling market. But the buyers aren’t going to default if the market keeps growing, so the appraisal should probably err on the side of caution.
You can compare a number with a range. The number is either inside or outside the range.
Banks would have their own models for how to lend and how much to trust the appraisal. Presumably they’d just set the confidence interval they want, and simply check whether the offer is less than the top end of the range.
That’s fine. Along with the range, there can be a “most likely” value to be used for taxation. I didn’t think of this because CA property tax doesn’t generally get reassessed that way. You pay based on the original purchase price. But it’s not a major obstacle.
In my experience some years back as a Realtor, the appraisers weren’t giving an actual ‘appraisal of the home’s value’ so much; what they did was stop looking at the value once they got to the amount of the house’s value. They were appraising it for the bank, not for some subjective value. IOW, say they had a house loan for 500K, and the swimming pool alone was worth 1 Million dollars. (Stupid, but, you get the idea). They would come out, see the pool, know that the bank wouldn’t be on the hook, so, the would say “Yep, the loan is good”, and that was enough for them.
That data is not stored in the tax records, at least in the online records I access locally. There is only one number for the assessed value, not a range.
As far as how the banks do it, I guess we’d have to have a bank loan officer’s opinion, as I am not one of them. :eek: It’s been my experience that banks are not as flexible as logic or common sense would dictate, and that’s not just for numeric values, either!
Perhaps you were not being literal, but the appraiser does not make that determination. The appraiser supplies a value, shows the calculations to the bank and the bank makes the decision.
From the three most important appraisals I’ve seen in my adult life, real estate appraisals are the very epitome of the phrase, “He who pays the piper calls the tune.” Arms-length means nothing. When someone’s paying you now, w/ the possibility of paying you again in the future, you’re a penniless moron if you don’t give them what they want.
If the appraiser shows a million dollar value of a pool, for a 500K house, the appraiser’s job is done; that is all of the calculation that is needed. Who will contest it? Even if the house floats off overnight. Bank is happy, everybody is happy.
I *was *being literal. Not necessarily thorough in my explanation, however.
handsomeharry, I wasn’t disputing the concept of an appraisal. I was disputing your claim that the appraiser could say “Yep, the loan is good” to a bank. The appraiser supplies a value and the bank makes that determination. That conclusion might be obvious in your example, but the appraiser does not make any decision about a loan; the bank does.