Written by Michael Rohm, MAI, CCIM
This entire article needs to lead off with a disclaimer: no appraisal is perfect, and every appraised value can be disputed. This should not suggest that every appraisal has errors, rather, it should suggest that there are many perspectives and philosophies on value – especially in commercial real estate. This is why I’ve often argued for appraisers to consider reporting value as a range rather than as a single point estimate. Of course, this is not always permitted depending on the client and scope of work. Nevertheless, this article is not intended to undermine the work that appraisers do.
There is no such thing as a perfect appraisal. The minimum standard for an appraisal according to the Uniform Standards of Professional Appraisal Practice (USPAP) is that the appraisal is credible, or worthy of belief. An appraisal is not right or wrong, it is credible or incredible/lacking credibility. The best appraisal is one that provides enough data to allow the reader to make their own conclusion, but is ultimately consistent with the appraiser’s conclusion. Therefore, the appraisal must include supporting data and convincing narrative to filter the reader in the direction of agreement rather than disagreement. Nevertheless, there will always be subjective conclusions in an appraisal that can be disputed.
Another disclaimer: reconsiderations of value will not always work. In fact, the majority of reconsideration requests do not result in a change in value. However, I’d argue that this is because they’re approached incorrectly by whoever is requesting the reconsideration. I’m not making any promises on an individual basis, but I guarantee that your chances of successfully challenging an appraisal will increase if you take some of the advice from this article.
So, this article is not intended to promote that ROVs will always be successful or that they should even be pursued in every circumstance. It’s not intended to discredit the work that appraisers do whatsoever. It’s intended to shed light on what appraisers do, how they operate, and ultimately, it’s intended to give you another tool in your toolbelt when encountering an appraised value that does not meet expectations.
Read the appraisal. All too often, appraisers are confronted with a disgruntled borrower or real estate agent that does not agree with their value conclusion but has not read the appraisal. Has this approach really ever worked for anyone? (Seriously, please tell me if appraisers are willing to change their value without substantive rebuttals.) Start the conversation off with a baseline level of respect for the time and effort the appraiser went through to produce their product. It is not the goal of appraisers to disrupt transactions. This isn’t personal. Read the appraisal and be prepared to provide facts, data, and an alternate perspective to what was presented in the appraisal.
Filter all requests through lender in financing transaction. There should be little or no communication between the borrower – or the borrower’s agent – and the appraiser during the revision process. While relevant communication during the appraisal process is encouraged before submission, the borrower and related parties should understand that the appraiser cannot speak about value-related aspects of the appraisal with anyone except the client. In most circumstances, the client is the bank for a financing or refinance transaction. If a borrower or real estate agent goes directly to the appraiser in the wake of an appraisal that does not meet expectations, the appraiser may not take kindly to the approach – especially if it is done so in a combative manner.
All revision requests should be sent to the lending institution. The lending institution will discern whether to forward these concerns or requests to the appraiser. It is important to follow these protocols when requesting a reconsideration of value.
Be proactive. Gather sales and develop a story to tell the appraiser on the site visit. Why did you list the property where you did? What is influencing value? What’s unique about the property? Proactively put these thoughts in the appraiser’s mind. Remember, the owner or real estate agent is much more familiar with the property than the appraiser during the initial site visit. Use that advantage in developing the story of the property being told to the appraiser.
I might get some heat from appraisers on this next one…
A dark secret is to put a much higher number in the appraiser’s mind than the desired value conclusion. The appraiser may anchor to that number.[1] There may be professional or personal ethical standards that this approach violates, so decide if this tactic is for you on an individual basis. For example, say the above property was under contract for $1,000,000. A subtle statement by the listing agent something to the effect of “I think we could’ve got $1,100,000 or $1,200,000” could very well influence the appraiser in a positive way. I don’t want to advocate for manipulation, but the reality is that real estate transactions require negotiation with multiple parties, and this is simply a negotiation tactic with the appraiser. It’s the appraiser’s job to credit or discredit whatever statements are made by the listing agent or owner in this context.
Many real estate agents actually provide an “appraiser packet” which may include comparable sales, listing info, lease agreements, floor plans, and a list of recent improvements, among others. While many of these property-specific items are ultimately obtained by the appraiser from the owner or listing agent prior to their report submission, the appraiser packet is a sign of goodwill that cannot be understated. Receiving this packet during the site visit essentially communicates to me that the real estate agent or owner respects my time and is willing to make this appraisal a priority on their schedule. We are dealing with human beings here, not robots. A sign of goodwill may positively influence the outcome of the appraisal.
Approach the situation humbly. Treat the appraiser as the valuation professional that they are. Typically, correspondence is respectful from the requestor of the ROV; however, some owners, brokers, or sales agents may discredit the role of an appraiser in a financing or refinancing transaction and that attitude may shine through during an ROV. Most appraisers can appreciate this perspective, however, they will not tolerate belittlement and condescension – nor should anyone.
The typical real estate agent knows just enough about appraisals to “be dangerous”. All too often, our human nature is to get defensive and aggressive when we think we know something but are faced with a conflicting result or opinion. Unless the requestor or the real estate agent has a background in appraisal or can speak the language of an appraiser, they should tread lightly with accusations that the appraiser did a poor job.
Agents should acknowledge that there is no single correct answer to a valuation problem, but in order to get what they want, they have to approach the situation humbly. Lead with open-ended questions instead of absolutism. The best time for an agent to display their market knowledge is before the appraisal is due by providing sales and commentary. The second best time is during an ROV.
Use open-ended questions. Use open ended questions like “could the reconciliation be higher in the sales comparison approach” or “have you considered…”. Open-ended questions acknowledge that there is not a singular correct approach or value conclusion in appraisal. Phrasing questions like this should be well-received by appraisers.
Look for errors. Some common examples of errors are summarized below:
- Has the appraiser represented the property correctly?
- Is the square footage correct?
- For residential – is the bedroom and bathroom count correct?
- For commercial – is the most likely buyer (owner-occupant or investor) identified correctly?
- Are the recent repairs or capital improvements noted in the report and considered throughout?
- Does the narrative throughout the report synthesize with the adjustments made in the approaches to value?
- Does the appraisal correctly analyze the highest and best use i.e. is the land worth more than the building as it currently exists today – in other words, should the building be demolished?
It is incumbent upon the ROV requestor to provide substantive support for the disagreement. Simply disagreeing with the value conclusion that you saw on page 3 without looking further will almost never result in a successful ROV. Nor should it. You are immediately making the appraiser aware that you are not willing to take the time to understand their work. Respect the appraiser’s work and their time by reading the report, attempting to understand it, and develop a cohesive alternate perspective that may influence value.
Play into ego. We have to understand the nature of an appraiser. An appraiser is similar to a judge in that they cast judgement from an ivory tower. Some appraisers are more open-minded than others. Regardless of their open-mindedness, most appraisers have a certain sense of ego – after all, they literally get paid for their opinion. Play into their ego to increase the chances of a successful ROV. Thank them for the time spent completing the appraisal. Point out comments or analysis throughout the report that you agree with. Lead with general positive feedback before questioning the specific parts influencing value.
Seek first to understand. Appraisers live in a world where most people think they can do the appraiser’s job. This isolation translates into a yearning to be understood. As the requestor of an ROV, seek first to understand. Come from curiosity, not judgment.
The requestor must make attempts to understand what the appraiser considers and what property factors may or may not influence value. Humble yourself and ask questions of the appraiser. Don’t be afraid to learn something. I promise, the 30-60 minutes spent with an appraiser discussing a report will be rewarded with successful reconsiderations of value in the future, given your new skills. And I promise that if you display a genuine interest in learning about what the appraiser does, they will spend 60 minutes with you.
Appraisers will not readily admit their philosophy or methodology is incorrect, but most will accept a different perspective if the requestor is able to present a cohesive and relevant argument. In many cases, this requires the requestor to speak the same language as the appraiser. The appraiser will be more attentive to a request coming from someone they perceive as a peer, but will likely dismiss a request that lacks cohesion and is irrelevant to the value conclusion.
For example, I recently completed an appraisal on an income-producing property whereby I developed the sales comparison and income capitalization approaches, respectively. The sales comparison approach indicated a value of $800,000; the income approach indicated a value of $1,000,000; my final reconciliation was $1,000,000 – giving 100% weight to the income approach. My client, the property owner, believed the valuation was low but approached the situation incorrectly. Not only were they defensive and combative, their entire argument was contingent on the sales comparison approach. I didn’t even give weight to the sales approach. I have no problem with educating people – many of you know that’s my passion; however, this is the type of revision request that irritates appraisers. In this situation, I was forced to take time and explain a situation to someone that could have done so themselves if they looked past page 3.
Are there better comparable sales in the market? If the appraisal gives weight to the sales comparison approach, consider providing the appraiser with more relevant and similar sales. This does not mean provide them with irrelevant sales that only serve to justify a higher value. The comps must be relevant and meaningful.
For example, maybe the subject has a unique feature such as a pool or large barn and of the appraiser’s comps, the sales include only one or neither of these features. It may behoove the selling or listing agent to expand the geographical radius of sales considered or go outside of the school district, county, etc. to find a comp that includes both of these features. When submitting these sales to the appraiser, use commentary to defend your position.
Expanding the geographical radius of sales considered is the most straightforward approach to finding more sales data, however, another approach is to pair sales. This is an appraisal technique that is a bit more involved, but could really impress an appraiser and will guarantee a higher likelihood of reconsideration. Using the above example, this technique would take a home without a pool and compare it to an identical home with a pool to extract the pool adjustment. The same methodology would be utilized to extract the barn adjustment. There are nuances that may not result in simple addition of these 3 property components (home + pool + barn ≠ value), however, this is an extremely good starting point. If you’ve found that this formula results in a higher value than the appraiser’s conclusion, you may have excellent grounds for an ROV. This methodology is called extraction and can be utilized to isolate any individual property component in residential or commercial valuation.
Leave the desired valuation out of the discussion. Psychologically, a desired outcome is more likely to occur if an interested party refrains from acting in their interest and acts objectively. Leave the contract price out of the discussion and attempt to communicate from the standpoint of enhancing the appraisal’s accuracy. You are not asking the appraiser to change the report. Rather, you are asking if they’d reconsider the value conclusion. It is not the appraiser’s job to hit a certain number. In fact, it’s impossible for an appraisal to “come in low”. An appraisal can come in below contract price, but an appraisal is an appraisal – it stands alone and is incomparable to contract price. In other words, sales agreements reflect pricing whereas appraisals reflect value.
If you don’t get your way. Use it as an opportunity to re-trade. There is no better time than an ROV for an agent to flex their negotiation skills. Use the appraisal as evidence that the property is listed above market value to support a lower contract price. I understand this will not always work; however, it is an opportunity if all other channels run dry.
Not all “low” appraisals are bad for the buyer. It’s important to note that appropriate and well-supported appraisals have often prevented self-inflicted wounds on behalf of buyers. In my opinion, this should be celebrated more than it is.
It’s the duty of a real estate agent to continuously learn about the appraisal process so that clients are better served by increasing the likelihood of closing.
The most important part of a reconsideration of value is to be considerate. We’re all professionals; let’s act like it. Seek first to understand what an appraiser does and how they do it. This learning should precede the reconsideration request. I guarantee taking an appraisal course or spending time with an appraiser and being genuinely curious about the process will save you a deal throughout your career.
[1] The anchoring effect is a cognitive bias that describes the common human tendency to rely too heavily on the first piece of information offered (the “anchor”) when making decisions. During decision making, anchoring occurs when individuals use an initial piece of information to make subsequent judgments.
This article was published on Commonwealth Commercial Appraiser’s Group (CCAG) blog. https://commonwealthappraiser.com/blog/f/tips-for-a-successful-reconsideration-of-value-rov