By Mark L. Plourde, MAI, Maine Valuation Company
What is the role of the real estate Appraiser in a purchase and sale transaction? Why isn’t the contract price used as the measure of market value?
Well, for starters, one proposed transaction does not constitute a “market” in terms of value. Just because one buyer and one seller have reached a “meeting of the minds” to forge an agreement based upon self-interest, it does not mean their actions reflect what most others would do in the greater marketplace. The various elements of any proposed transaction price need to be examined in relation to the definition of Market Value itself to ensure that the contract price is actually reflective of the market, and not based on atypical conditions. When conducting due diligence, Appraisers often find transaction related information that is not accurate. Unfortunately, such misinformation has only gotten worse with the explosion of on-line “secondary” internet resources. The knowledge and motivations of participants in a transaction can vary quite widely as well. So do you think the actions of just a few should speak for most/all market participants? Separating the facts from fallacy does take time and effort. It is the real estate Appraiser’s responsibility to uncover the facts to be found, and to conduct appropriate due diligence and analyses of comparable market data when forming an opinion of market value.
It should come as no surprise that the real estate appraising is a highly regulated profession – and it should be. After all, important financial decisions rest upon such appraised opinions of value being accurate and unbiased. The Uniform Standards of Professional Appraisal Practice (USPAP) is the primary guide to professional practice in this industry. USPAP defines an Appraiser as “one who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective” Thus, it is the expectation of the marketplace that the role of the Appraiser will reflect competence and independence when rendering his or her services, and such actions are codified by regulatory laws, rules, and ethical standards.
In addition, of all the participants in a real estate transaction, whose compensation is not based directly or indirectly on some form of contingent fee basis? The Appraiser – that’s who. Anyone is capable of convincing themselves as to what the property’s market value may be when there is some financial reward to be gained from that opinion. The payment of a fee for an appraisal service however is not contingent upon the concluded market value opinion, or whether the deal closes or not. This is a significant difference between Appraisers providing Appraisal Services and others in a typical transaction. So when faced with multiple opinions of value from multiple sources, perhaps you might want to ask yourself who stands to gain the most financially?
In conclusion, estimating the market value of a property may appear to be fairly easy on the surface. However, providing a qualified and accurate appraisal of market value is quite involved. Limitations can also result from the availability of sufficient confirmed primary market data coupled with “commodity approach” demands of ever faster turn-around time and lower appraisal fees. Whatever the limitations are however, the role of the real estate Appraiser is to properly define the appraisal problem to be solved, develop an appropriate scope of work, and then provide such appraisal services in a competent, independent, and unbiased manner in compliance with professional standards.
Mark L. Plourde, MAI is the Managing Partner of Maine Valuation Company and a MEREDA member since 1997. Maine Valuation Company provides unbiased professional opinions of value on commercial real estate along with appraisal review services throughout Maine. www.mainevaluation.com