When One Appraisal Approach Contradicts Another

Concluding conflicting value opinions using different appraisal approaches is just part of the appraisal process, it happens often. I have analyzed properties and had all three approaches come together in unity, but more often than not they don’t, and I have to make sense of them and reconcile my conclusions.

The question that appraisers have to ask themselves, and discuss in their reports is “do these analytic differences make sense?” It’s obvious when a building is clearly overbuilt (due possibly to super-adequate improvements) and the cost approach reflects the atypical replacement costs, there should be a difference in that instance. It’s also easy to spot a difference when a rental rate from a subject property is much higher or lower than the market rate and the income approach provides an atypical result.

There have been years when the cost approach just did not provide a reasonable value conclusion. It’s not that the Marshall Valuation Service (MVS) data or other cost data was inaccurate, it’s just that the sales approach indicated values that were so much lower than those indicated by MVS that they couldn’t be reconciled. Many appraisers simply noted, as many still do, that buyers and sellers (market participants) do not rely on costs to make their listing or sales decisions.

When you don’t recognize why the conclusions of two approaches diverged, and the difference ends up being substantial, you have to go back and examine each of the analyses again. Maybe your capitalization rate wasn’t correct or you selected comparable sales that were all too low or too high. Maybe your adjustments were not large enough?  Even appraisers realize that there may be a possibility that their one of their analyses went awry, it happens.

It’s not that the results from your appraisal approaches have to match up, as I noted that rarely happens, but there may be a reason for very large differences. I become concerned if I have to reconcile value opinions reached that are far apart. If two approaches produce market value conclusions near $ 1,000,000 but the third approach says $ 3,000,000, then I want to understand why.

Many appraisers work through their analyses without paying much attention to the results of the other approaches until they get through them and then they discover that they have a problem. An appraiser has to consider what is reasonable and they often fall back on the strongest approach to provide a reasonable value range. An approach that is clearly not reasonable can often be ignored or discussed and not included in the report.  If the cost approach is going to do nothing but provide a market value conclusion that is outrageously high, why include it in your report?  I realize that there may be times when you have no choice, but there are others when you do.

Appraisers recognize that they are seeking market value and that they are not just analyzing a property to come to an opinion that makes no sense, there is first the reasonableness test. One of the best ways to know that you are on the right track is to look at similar available or offered properties, they will usually be offered at a price higher than comparable sales but they offer a limiting high point and a starting point for a difficult appraisal. Contingent and pending sales are even more valuable than offerings especially if you can discover their negotiated contract price.  In Nevada and many other states that is difficult since agents protect that information as confidential prior to closing.

Appraisers understand that you have to expand your search area if you can’t find comparable sales and if that doesn’t help then you may need to look at older sales. For commercial properties and vacant land appraisers an appraiser at times to work with distant sales or sales that are more than 6 months old. There are areas and property types that require research over a state-wide or multi-state area and farther back in time than 1 year.

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/

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