Portland Area Real Estate Appraisal Discussion

When a home is exposed to the market under normal conditions, it will most often sell within a reasonably tight range.  This range is the most probable price and is a fundamental part of the definition of market value.  So how is it that market participants (buyers, sellers, and agents) usually agree on a price that is close to market value, even when they are not making adjustments, verifying data, and analyzing statistics like an appraiser does?  There are three key factors why the market usually gets the price right.

1. When someone decides to buy or sell a home, they usually start by contacting an experienced agent who provides expert advice.  Agents help to educate buyers and sellers on factors that may not be readily apparent to the layperson.  An agent may or may not know the value of a property, although most agents have experience in setting price based on comparable sales or other approaches.  (Even so, I still recommend ordering an appraisal before you sell).  In addition to helping with setting strategic list prices or offer prices, an agent will be able to point out local trends, help guide decisions, and provide buyers or sellers with a foundation to start searching.

2. Buyers will usually determine where they want to purchase and start looking at homes in their price range to see what is available.  When a buyer is focused on one area, one price range, and one set of key features, it is not long before they can accurately determine what a good deal is.  Buyers will not necessarily know what market value is, just that some homes are priced better than others given the buyers’ individual need and budget.  This process usually leads a buyer to the right price.

3. Sellers will set a price, but once the home is exposed to the market, they will usually know quickly if the price is close to market value.  A home that is priced very high will typically not receive many showings.  A home that receives showings, but no offers, might only be slightly high.  A home that is priced too low will often receive multiple offers and still sell for close to or even more than market value (depending on many factors but there are different opinions on this).

This begs the question, if buyers usually get the value right, then why do banks require an appraisal in a purchase?  The answer is that buyers usually get it right, but sometimes do not.  Some properties are unique, and buyers will just fall in love without sound justification for the price.  Other times there are non-market factors that influence the price.  Whatever the case, banks use appraisers as one way (of many) to verify and protect their interest in the loan.  The typical appraisal cost is very low in relation to the cost of making a bad loan.  An independent opinion of value from an experienced local certified appraiser just makes good financial sense.

Did I leave anything out or do you want to join in the conversation?  Let me know in the comments below.

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Thanks for reading,

Gary F. Kristensen

Another well thought out and written post. Thanks for the education.

Thank you Casey for following and for your kind words.

Good stuff, Gary. "The typical appraisal cost is very low in relation to the cost of making a bad loan." That is definitely true.

You said: The answer is that buyers usually get it right, but sometimes do not. I think there is more to it than that. If history offers us any lessons it's the "market" will behave irrationally from time to time. Licensed appraisers were put in place by the federal government, managed on state level, to try and mitigate volatile markets, which on the whole, are disruptive and bad for the overall economy. While not a perfect solution, just knowing that an unbiased third party (the appraiser) will be involved probably keeps most buyers and sellers (not to mention lenders) from making irrational decisions. In short, appraiser are part of a 'check and balance' system.

Great synopsis of how the process works Gary. I always like to point out to sellers that pricing a home correctly can help them sell it faster thereby decreasing marketing cost. This savings in marketing costs can offset the very reasonable cost of the appraisal.

Thank you Ryan, Mike, and Tom for your comments. Mike, you're absolutely correct that the market behaves irrationally sometimes. However, if the market is irrational, I believe it is still market value if the typical buyer is behaving that way. In the lead up to the market collapse in 2007, I believe that the market was behaving irrationally. However, there was nothing that appraisers could do to stop it. There were comparable sales to support the majority of prices that were occurring at that time. The majority of buyers and sellers were acting knowledgeably and without undue stimulus. Properties in 2007 were selling for market value, it was just an inflated market that soon fell apart. Tom, I agree, appraisals before you sell is money well spent.

Pricing a property correctly is one of the most important reasons to get an appraisal before you list your property for sale.

Number 3 could not be more accurate, great appraisal post.