Same House, Different Appraisal

Although real estate appraisals are based on verifiable facts, the appraisals themselves are simply someone’s opinion about the value of a given property, and opinions can vary. To be fair, appraisers have specific training and many of them have the kind of experience that puts their assessments spot on when it comes to fair market value, but it’s important to recognize that not all appraisers (or appraisals) are created equal.

I was once asked to provide a private party loan on a property in the coastal town of Westport, which isn’t much more than a wide spot in the road. The property was a modest 2-bedroom, 2-bath house on 20 acres with a beautiful view, listed at $1.3 million. The appraisal came in at $1.15 million, which seemed high to me. When I had a second appraiser assess the same property—someone who actually lives on the coast and had seen the comparable properties inside and out (as opposed to reading about them in a report), her appraisal came in at $850,000.

Same house. Same day, more or less. Three hundred thousand dollars apart.

My client, to their credit, admitted the higher number had felt inflated all along. I offered a loan in line with the property’s fair market value, and we all lived happily ever after. But that’s not always how it goes.

Why Get an Appraisal?

People get real estate appraisals for many reasons, and this matters because there are different regulations and different goals at play. The primary reasons people get appraisals are estate planning, estate settlement, conventional bank loans, private party loans, and insurance needs.

• Estate planning: In this case, accuracy is critical, especially with multiple properties or heirs. The goals are to ensure that relative values are fair: mandatory expenses and debts are covered and the resulting equity is appropriately allocated (e.g., college fund savings, first-time homebuyer down payment).
• Estate settlement: Beneficiaries typically want an appraisal to come in as high as possible to establish a new cost basis, which will reduce income taxes on a future sale; however, this may raise property taxes on investment properties.
• Bank loan (conventional): Thanks to a law put in place after the 2008 housing bubble burst, appraisers are randomly assigned for conventional bank loan appraisals, and the other players involved in the sale—REALTORS, lenders, buyers, and sellers—are legally prohibited from influencing the appraiser. What this means in practice is that those with the most accurate and up-to-date information (REALTORS) aren’t supposed to talk to appraisers. In a small town, however, this rule is often broken.
• Private party loans: Here, the lender is looking for a property’s fair market value right now, not what it could fetch with seller financing or if the perfect buyer arrived and offered a premium. The lender needs the property value assessed in its current condition with any cleanup costs like permits or environmental remediation deducted from the overall value.
• Insurance evaluation: For insurance purposes, you’re not interested in selling your home, but rather the cost to restore it to its current condition after being damaged, as in fire or flood. You’ll want to know how much coverage you need to replace what you lost and bring your house up to current building codes. If your home was built last year, code upgrades won’t be too expensive. But if insurance only replaces what you had, and you had a home built in 1947, you’ll be on the hook to pay for upgrades to insulation, electrical wiring, plumbing, and more.

So where do you go from here?

Find out if you get to choose the appraiser. On a conventional loan, you don't. On a private loan, an estate matter, or an insurance claim, you may. Ask your REALTOR who they trust. You want someone who knows the area and knows the market. Your REALTOR will know who to recommend.

Know your purpose before you get the number. A "good" appraisal for an estate settlement is a "bad" one for a private-party loan. The number isn't wrong; it's just answering a different question than you thought it was.

Don't assume the first number is the right one. With conventional loans, you may not have a choice in the appraiser, but in other cases, sometimes you can get a second opinion. As the Westport house proved, it can be worth shopping around.

If you have questions about property management or real estate, please contact me at [email protected] or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.

Dick Selzer is a real estate broker who has been in the business for more than 50 years. The opinions expressed here are his and do not necessarily represent his affiliated organizations.