Bringing in the Number

It’s my opinion that there remains in the mind of the public and in the mind of some real property professionals confusion about what is sought in a real property appraisal.  Most people understand that appraisers are usually seeking to conclude via their analyses an opinion of market value, not a potential price, worth or simply a value.

Market value definitions vary but for the most part it has been recognized as “The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.”

What is confusing to some is that the market value definition is not simply saying that the market value of a real property is what a property would bring in an open market if the price is agreed to by a buyer and a seller.  What is often agreed to by a buyer and seller is not the most probable price that a property would command but a price well in excess of it.

Appraisers are charged with knowing the market, and when a residential property is being appraised we look at the area surrounding the subject.  Using Las Vegas as an example, appraisers look at entire subdivisions of tract homes that have usually been constructed by the same builder in the same year.  We look at factors including; sales price trends, days on market trends, asking versus sales price ratios and the number of listings over time.  We discover similar homes that are often model matches that have the same layout, the same square footage, a similar interior finish and similar amenities.  Adjustments are often required but being able to see interior and exterior photos brings comparison to an amazing level.

So when an appraisal assignment is brought to us and we discover that there have been 20 tract home sales with the same exact size within the subdivision over the last year that sold in the open market between $ 140 per square foot (SF) and $ 150 per SF and that the price agreed to between a buyer and a seller in the open market was $ 175 per SF without there being significant differences we may conclude that the negotiated price is not be the most probable price for the property.  That fact that two parties have agree in an open market to a price is thus not always the basis for an appraiser’s market value conclusion.

Some appraisers have difficulty in these situations because they don’t want to conclude a value that will destroy a transaction negotiated in the real estate market simply because of their opinion.  That’s why some appraisals seek to simply “bring in” a negotiated value opinion.  Most appraisers will however favor their training and appraisal methodology and conclude a market value opinion that is based on market data and not simply what has been negotiated.

It’s not surprise that when buyers feel uncomfortable with their bid they rely on appraisers to bring their offers back to the reality of the market, and many condition their offers with a provision that states that “the offer is subject to the appraisal.”  Like it or not appraisers are in a sentinel position that they don’t want and don’t enjoy but if the financial institutions or real estate brokers find a way around us, what do you think will happen in the markets?  Any guess?

For more appraisal information contact Glenn J. Rigdon MA, MRICS, ASA is a Las Vegas / Henderson Nevada based appraiser who can be contacted via email or via his business website known as Appraiser Las Vegas  (http://www.appraiserlasvegas.com), or you can also click on “Contact Us” on the home page of this website or visit my public profile at LinkedIn at http://www.linkedin.com/pub/glenn-rigdon-ma-mrics-asa/1a/30b/879/

Article source: http://www.appraisalarticles.com/General-Appraisal-Articles/Market-Conditions-Articles/4605-Why-Market-Value-is-not-Always-What-Is-Agreed-Between-a-Buyer-and-a-Seller.html