William Apgar, former commissioner of the Federal Housing Administration, was recently quoted as saying that real estate appraising is an art form, not a science. A statement like this from such a high-ranking official can add fuel to the fire in the never-ending debate over whether appraisers are artists or scientists. Much can be said for both sides.
Before we come to a conclusion on the matter, let us examine how
an appraiser actually determines the value of a property. In a
broad sense, value is determined by supply and demand. It should be
noted that a parcel of real estate, just like an appraisal, is not
a commodity, as some would like us to believe. Each property is
unique unto itself. If for no other reason, each piece of real
property is different because of its location.
Describing a certain parcel of real property is a responsibility of the appraiser. Collecting data relative to supply and demand is also an appraiser's responsibility. Once this is done, the appraiser must organize the facts. Appraisers must use a set of methods and procedures known as the Uniform Standards of Professional Appraisal Practice (USPAP) in order to guide them through the decisions that ultimately lead to values being attached to properties. This suggests that science is involved.
When appraisers do render a final opinion on the value, they do
so, using personal judgment once they have followed the scientific
procedures required of them. While appraisers have latitude in
rendering their final value opinions on property, the value is
influenced primarily by the data and other information that is
collected, as well as their own knowledge and expertise.
In this regard, other professions involve a mixture of art and science. One example would be an architect. Yes, buildings are supposed to be attractive and they are expected to be appealing to the eye. In fact, many times they are sold based upon how good they look. Regardless of what the building looks like, however, if it does not conform to the laws of physics, it may crumble under its own weight. The same can be said about the design of automobiles, furniture or anything else that needs to be both attractive and functional.
It is fair to say that appraisals have elements of both art and
science within them. An appraiser can only assign one market value
to a property. If 10 artists each painted an oil canvas of the same
home, you would, in all likelihood, wind up with 10 distinctly
different pictures. They may have some similarities, but there
would be variance in the artists' styles and renditions. Along the
same line, if 10 licensed or certified appraisers appraised the
same house, following all required and ethical procedures, you
would still, more than likely, get different opinions of value,
although hopefully, they would all be reasonably close.
There are a number of reasons why appraisers might come up with different value opinions on property, even though there is a scientific basis behind it. One of the big problems is finding current, accurate data. There is no single source for such information, and each appraiser is responsible for finding his or her data. Probably the most utilized source of data for real estate appraising is the Multiple Listing Service (some areas have more than one). Some appraisers also check deed transfers at the local courthouse. There are other sources of information as well, such as professionals exchanging data among themselves. Since there is a variety of ways appraisers can come up with data, there are situations when opinions differ on the value of the same property because appraisers used different data sources to reach their respective conclusions.
In my opinion, appraisals of property in a homogeneous
neighborhood should be within two-three percent of one another.
They certainly shouldn't be more than five percent apart. This
doesn't apply to unique properties. In other words, if the property
to be appraised is an 8,000-sq.-ft. home on 50 acres of land on top
of a mountain with nothing like it anywhere around, we would expect
a broader range of values.
Appraisers are not only permitted but also required to use their judgment in coming up with a final conclusion on the value of a property. One part of the profession where "art" comes into play is that in rendering their final conclusion, most appraisers round off the values. Some round it off to the nearest $100 or $500, but is seems that most round it off to the nearest $1,000, particularly in properties that have higher value. Therefore, when an appraiser rounds off a final value, this accounts for some percentage of the variance.
Art also comes into play when an appraiser factors in issues that can't be measured by data, such as the condition of the property, the quality of the construction and the specific location. The appraiser has guidelines that help deal with these issues, but not enough to give them specific figures regarding these issues.
Taking all of this into consideration, I can't say that I agree
with Mr. Apgar on this subject. I consider the process of real
estate appraising to be both an art form and a science. Sure, we
hear of instances where a given property was appraised by two or
more appraisers who yielded significant value-opinion differences.
This, within itself, does not mean that the process is simply an
art form. While there is room for some differences of opinion among
appraisers (I am from the school that subscribes to that theory),
in those cases, the best appraisal is prepared in the strictest
accordance with USPAP.
Therefore, it is my opinion that the process of appraising is as much, if not more, science than art.
Charlie W. Elliott Jr., MAI, SRA is president of ELLIOTT & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889, [email protected] or through the company's Web site at www.appraisalsanywhere.com.