Are Appraisals Just an Average of Sales?

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On two separate occasions within the last several weeks I have ran across instances where real estate professionals have made the statement that the value appraisers come up with is just the average of sales. Have you heard this, or is this what you think? This could not be further from the truth, so I felt it necessary to explain how appraisers come up with their final value estimate in an appraisal report.

The value estimate arrived at by a professional appraiser is more than just the average of the sales used. A minimum of three closed sales are required in a typical appraisal, and in today’s lending environment many underwriters require additional pending sales and competitive listings. An average appraisal may have 4 to 6 value indicators. Adjustments are made to these sales to adjust them to the subject property. An average of these comparables would place equal emphasis on all of the sales, however depending on the property and the market it is located in, placing equal weight on all sales may not accurately reflect the true value of the home.

A home that has been well kept and that is in very good condition may reflect the upper end of the value range, as might a  home that is in a hot neighborhood where inventory is low. On the flip side, a home in bad condition that needs updates may best be reconciled at the low end of the range to reflect the decreased appeal and marketability. The lower end of the range might also be more accurate because of the predominance of distressed properties in the area and the limited popularity and demand for homes in the neighborhood.

As I noted previously, appraisers are increasingly being asked to consider pending sales and active listings in the same subdivision or other competititve market areas. A good example of reconciling at the lower end of the range might occur when all the closed sales are at a certain price range and the pending sales and listings are at the lower end of this range. Choosing a value at the the lower end of the adjusted value range would more accurately reflect current value trends. If you used the average of all of the comparables the value may be higher than what the market data is indicating, giving you an inaccurate appraised value.

I hope you can see that a lot more goes into arriving at the appraised value than just averaging sales. It is a combination of factors that take into consideration the subjects condition and appeal, supply and demand for properties in the competitive market area, and the appraisers education and experience. Do you have any further questions about how appraisers arrive at the fianl value estimate of the home they are appraising? Leave me any questions you have in the space below and I will get back to you with an answer.

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