Consumers often get confused between an appraiser’s opinion of value and a Realtor’s market analysis. The opinions of value often differ significantly. When price rose quickly back in 2004 and 2005, the Realtor’s opinion of value were much higher than an appraiser’s opinion and in the current market where price are on a rapid decline, the Realtor’s opinion will be much lower than an appraiser’s opinion. So why does this disparity in opinion exist? The disparity can be contributed to the appraiser’s focus on purpose and the Realtor’s focus on function in forming the opinion of value.
An appraiser aims to provide an unbiased, supported and defended estimate of the value of a property’s bundle of rights. They’re just concerned with the purpose or type of value to assign to the property and not concerned with the function or how the assignment of value will be used so the focus is not on whether or not a property will sell at the appraised price. Appraisers need to be able to defend and support the opinion of value using the sales comparison approach, the cost depreciation approach, and the income capitalization approach within the guidelines of USPAP (Uniform Standards of Professional Appraisal Practice). Therefore, appraisers never account for properties that are currently on the market, properties under contract, or properties that failed to sell. Appraisers typically take minor details into account and also measure the size of each property they inspect. They certainly take a more detailed look when forming their opinion of value and only account for properties that have actually sold to formulate a specific price for a property such as $1,002,321.
On the other hand, a Realtor’s market analysis focuses more on the function and less concerned with justification. They want to ensure that a property will sell at the price designated by the market analysis. After all, Realtors only get paid if and when a property sells so the focus is to come up with a price that is attractive enough for buyers. Realtors take into account the number of competing properties and list prices into consideration to determine the level of competition. They assess the properties currently under contract to determine which prices were attractive enough. They determine the maximum list price by investigating properties that failed to sell. On top of all that, they also take the sold properties into consideration. Realtors really only account for major differences in properties. Thus, Realtors perform a more comprehensive analysis of price and market conditions but less detailed than appraisers. The resulting value from a Realtor typically show a range of prices that a property could list for and sell such as $900,000 to $1,100,000.
So the disparity in the opinion of value between appraisers and Realtors can be attributed to the appraiser’s focus on purpose and the Realtor’s focus on function. That’s the difference. Typically, appraisers are hired by federal lending institutions to justify a purchase price on a home while consumers selling their home get an opinion from a Realtor to figure out a price that will get their home sold. So who’s right? It’s all just a matter of purpose vs function and of course the competency of the appraiser or Realtor.