An appraisal of a home includes a definition of value. Typically, that definition of value is for “market value” or something similar. There are many official appraisal definitions of market value. Often such definitions begin with the phrase “The most probable price,” as shown in the example below. Do you know what the most probable price is?
The above market value definition, from the 1004 Uniform Residential Appraisal Report form, starts with, “The most probable price….” What does that mean?
The concept of most probable price suggests that if a single property were hypothetically exposed to the market many times over the same period, it would not always sell for the same price. If the property sold enough times, the resulting sale prices would likely be distributed along a range and resemble a bell curve when graphed.
In the above illustration of a bell curve, the sale price range would be from left to right of the graph or on the x-axis. The number of times that the property sold at a particular price would be graphed bottom to top or on the y-axis.
The bell curve shows that most of the sales are likely clustered in the center with fewer and fewer sales moving up or down on the price scale (away from the center of the curve). This means that an accurate appraisal should conclude a value close to the peak of the bell curve. Appraisers can also provide a value opinion in the form of a range, but a single point is often requested and value opinions will vary among appraisers.
If more than one appraisal is ordered for the same property, most appraisers should conclude a value that is close to the peak of the bell curve. The larger the quantity of comparable sales data, the closer one would expect appraisers to be able to find the peak of the bell curve accurately and the closer the value opinions would be among different appraisers. Since small differences between appraiser opinions of value can significantly affect the lives of people who use appraisals, it is important to select your appraiser carefully.
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