There are few things in life that, to me, are less complicated than basic economics, understanding human behavior, and estimating the value of the property rights associated with a parcel of real estate. That’s because, they’re each based on common sense interpretations of everyday events in life.

Let’s take a common-sense example in economics: When there are 2 items perceived to have equal utility and desirability, the one with the lower price will be in greater demand and achieve more sales (gain wider distribution). That basically sums up the description of the Principle of Substitution. And, anyone who’s gone shopping for anything fully understands this basic economic principle.

Okay, now let’s move on to some basic human behavior. Wait a minute, I believe, that when I just described the Principle of Substitution I also described an example of human behavior. Right?

Of course, I’m right. Because, basic economic principles are merely the written form of observed typical human behavior in economic situations. This fact is borne out in many books, but, in my humble opinion, is best demonstrated in a book entitled, “An Inquiry into the Nature and Causes of the Wealth of Nations.”

That book was written in 1776 by a man named Adam Smith. And, no; he was NOT an economist. Rather, Smith was a Scottish philosopher who wrote his book after years of merely observing and analyzing the behavior of vast numbers of people involved in various types of business transactions.

So, what does all of this have to do with appraising?

EVERYTHING. Because, an appraiser, like Adam Smith, is merely supposed to observe, analyze and understand how people perceive the value of real estate, then translate those observations into words to communicate an opinion of the value most people would place on a given property. Let me give you a typical example.

There’s a 3 bedroom, 2 bath house with a 2-car attached garage in a subdivision of about 60 very similar homes. Now, all are the same age, about the same size (with insignificant variations), and are in the same good condition. And, the subdivision has a very low-traffic volume because there’s only 1 point to go in and out, and there aren’t any thru streets to go anywhere out of the subdivision. So, it’s rather private.

Joe is selling that 3 bedroom, 2 bath house with the 2-car attached garage in that subdivision. He’s not upside down on his mortgage, he’s not behind on his payments, he’s not being forced to sell (except that his wife want to live closer to her mother), and the house is well kept.

Joe hires an agent, and the agent finds a buyer who’s ready, willing and able to buy, already having been qualified for a mortgage. They agree to a price of $139,000, which is subject to an appraised value of the same amount.

KEEP IN MIND, Joe, his agent and the buyer all know, a) there’s only 1 other house for sale in Joe’s subdivision by an owner who’s in serious financial trouble, but can’t sell because he can’t come to terms with his lender, and (more importantly) b) there have been 3 actual sales of very similar homes to Joe’s in his unique subdivision within the past 6-7 months:

1 was sold by the owner who was in the same normal selling situation as Joe who sold his house for $140,000;

1 was sold by an owner who was behind on his payments and trying to sell to avoid foreclosure, but needed the approval of his lender because the sale price was lower than the amount of the mortgage loan; that house also sold for $140,000; and

1 was sold by a bank who foreclosed on the former owner and just wanted to get out from under the loan, and they sold that house $123,500.

COMMON SENSE tells us, that, because Joe is NOT in the position of being FORCED to sell, his house can probably sell for somewhere around the $140,000 mark. Right?

But, here comes Mr. Appraiser, who totally ignores all 3 of the homes sold in Joe’s subdivision, and searches far and wide and uses sales that are in very different and less desirable locations, have all been sold in FORCED SALE situations, and ultimately tells Joe’s buyer that the market value of Joe’s house is $120,000.

Needless to say, Joe isn’t going to be selling his home to this buyer, because, due to the appraised value, this buyer is unable to obtain the mortgage amount necessary to close the transaction. Joe is also faced with the problem, that other buyers also may not be able to get financing in an amount sufficient for him (Joe) to sell his house at the value that he (and, any other reasonable thinking person) should get for his house.

SO, where’s the evidence of this appraiser’s “common-sense” that is supposed to be at the heart of what an appraiser is required to rely upon?

Frankly, folks. This is an absolutely true story of an event that I have just personally observed, first hand. But, sadly, it’s only 1 of seemingly countless occurrences of the idiocy of many in the appraisal industry. And, no, it’s NOT a profession; but, that’s a topic for another post.

I’m sure there are some very good, common-sense appraisers out there in the world. But, I’m just as certain there are far more that are not.

As usual, your comments are welcomed and appreciated.

This entry was posted on Friday, March 26th, 2010 at 5:12 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.