Wednesday, October 25, 2017

Stand Your Ground

Forty-five years ago when I decided to announce to the family that I wanted to be an appraiser, my father-in-law, a crusty ole farmer from northern Indiana, said the appraisal business was nothing more than a scam.  “I just bought my neighbor’s farm” he said.  “He and I agreed $1,000 an acre was fair.  Why should I pay some appraiser to tell me it is only worth $900 an acre?”  A good question.

My answer then is close to what I would say today.  My job as an appraiser is to help the lender understand what the typical buyer would pay for the site if, heaven forbid, the borrower never makes that first payment.  The lender doesn’t care what the borrower paid, or what it cost to replicate, or what conditions were included in the transaction – they just want to be assured that if they get the property back, they can sell it for enough to pay back the debt.

Actually, the question is just as pertinent today as it was then – except the typical scenario is the property has been listed for $150,000, there is a full price offer, a bidding war erupts, and before the dust settles, there is an accepted offer of $165,000.   A detailed comp search shows there has never been a sale in the neighborhood of over $145,000 and the best, most recent, most proximate comparable sale is the house next door that just sold for $140,000 - $25,000 less than the accepted offer.

A quick call to both brokers involved indicate that, yeah, this is a bit unusual, but hey, there are plenty of supporting sales outside of the neighborhood that have closed over the last several years.  Surely, if you look hard enough you’ll be able to make this work. 

No. It is not our job to help make anything “work”.

The answer, again, is that we appraisers are looking for sales that support what the value should be – not what the price was. We are bound to find the “the most probable price that 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.” 

Bidding the final price up to something like 15% to 20% more than the list price is not typical and, in all likelihood, represents some undue stimulus. Hot seller markets push prices but not necessarily values.   Stand your ground.  Appraising within the basic principles not only protects us, it protects our clients.

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