The Bell Shaped Curve
"Understanding Value Conclusions"

There may be several paths that have led you to this article on this website. You might be a Loan Officer or Loan Processor browsing our site. Or possibly you've disagreed with an appraiser's evaluation of your property. Whatever the reason, I'm confident that I can give some insight into the appraisal process. An insight that is uniquely simplistic in it's presentation. An insight presented by someone who has personally performed several thousand appraisals.

Being an appraiser is sometimes like being a referee. There are several players or parties to every transaction. If the appraiser's evaluations are too high then the lender can become disenchanted. If the appraiser is consistently conservative then the Loan Officer's can become disenchanted. Likewise, the dynamics between the sellers, buyers and Real Estate agents can be equally challenging. It seems that the appraiser is often either the hero or villain depending on the frame of reference.

I have seen an artist's pictorial of the same home viewed from different reference points. There's the home owner's view which is often, "somewhat embellished." There's the tax assessor's view of your home, "a Grand Estate." There's the insurance adjuster's view, after a claim is made, "a shack" and then there's the appraiser's view of your home, hopefully "somewhat realistic." Who's right? I guess it depends on your reference point. This brings me to the ideal starting point!

The bell shaped curve! When I talk about value I love to talk about the bell shaped curve. The #1 question I get while out in the field is, "Now that you've seen my home, what is it worth?" I've been asked this question literally hundreds of times but each time I must step back and gather my thoughts. You see, to me that can be a very complex question. I'm confident I could write a book on just that one question. The easiest way for me to explain, what a house is worth, is with the bell shaped curve analogy. Appraisers are required to determine "A" value, a "single value," however; the truth is a "range of value" always exists. The more unique the home is, the more variance that may exist. For example, a round home, an earth home, a home with significant acreage, a home in a rural area, a very expensive home, a home which is un-characteristic for the neighborhood would all have greater variance as compared to, for example, a condo within a complex with identical units that have recently sold. The range of value is best depicted on the bell shaped curve.

What is the definition of value in a Real Estate transaction? The definition is when two educated, unrelated parties' buyer and seller come together and they are not subject to outside influence or pressure and agree on a price. On a bell shaped curve this value, in theory, would be straight up 12:00 O'clock or at the apex of the curve; however, other values on the curve are also probable. Often, one party is more educated in the area or gets better advice or one party has significantly more motivation to buy or sell, in which case other points on the curve are achieved. If the buyer gets the better end of the deal and pays a lower price, "under market value," the transaction would be plotted on the left side of the bell shaped curve or before the apex or true value of the home. Likewise, if the buyer paid too much for the home, the transaction would be plotted on the right side of the bell shaped curve or after the apex.

I have heard homeowner's state matter-of-factly that their home is worth more than the appraisal that they've received or their agent told them that their home was worth more or even possibly that they have a previous higher appraisal. My immediate thought is where on the curve is the homeowner, agent or previous appraiser? Is the homeowner, agent or appraiser on the right side of the curve? If there is still some slope to the bell curve on the right side, then the homeowner, agent or appraiser has some probability their opinion has some merit. Obviously, the further you go from the apex of the curve the smaller the percentage or likeliness that the value is accurate. I'm always intrigued that homeowner's always side with their highest appraisal unless it's from the tax assessor. Eventually, the bell curve parallels the X axis with zero probability. The homeowner must understand that an appraisal is the appraiser's opinion and just as they are entitled to their opinion, the appraiser ought to be entitled to his/her opinion. There are short comings to an appraisal. The appraiser is not privy to the interior of the comparables and must rely on the realtor comments as to the condition of the interior; unfortunately, realtors have been known to embellish their listings to attract more potential buyers. In short, an appraisal is as good as the information. The phrase "garbage-in garbage-out" definitely applies. If a realtor has misrepresented the square footage or interior room counts/amenities or has embellished upgrades, then the appraiser is working with misleading information and unfortunately the appraisal may reflect these inaccuracies.

When improvements are made to a home it's important to make clear that it's not what an improvement (or amenity) cost, but rather what a potential buyer will pay for the improvement (or amenity). For example, a homeowner might say, "I bought this home for $100,000 and then built a $25,000 garage so I'm thinking the home is now worth at least $125,000." The truth! Appraisers don't necessarily care what an improvement (or amenity) cost but rather what a potential buyer will pay for the improvement (or amenity). Some homeowner's make improvement's themselves and some contract the work out. The cost is not relevant. The method Appraisers use is called extrapolation. In theory, using the above example, you have two homes, one home with no garage and one home with a new garage. If the home with a new garage sells for $10,000 more than the identical home with no garage. It could then be extrapolated that the new garage, even though it cost $25,000, is only worth $10,000 in the market place. Obviously, the grid adjustments which are typical within a market area are well tested and are determined on a large scale; however, the example does at least illustrate how appraisers think and adjust in the "market approach" for improvements (or amenities).

Here's a question to ponder, a question that is no stranger to Appraisers. I will ask the question in the form of an example. If you have a $100,000 home and receive a $100,000 appraisal for the home, is it possible in 6 months or 1 year after you've spent $10,000 on landscaping and new fence, to receive a second appraisal for some figure below your original appraisal? Answer: Absolutely! I'm perplexed by homeowner's and even Real Estate agents that automatically assume that their home or their client's home will automatically increase in value because of the improvements, added amenities, or because time has elapsed. The sales data is always revolving. If time has elapsed, the sales that were available to the first Appraiser might not be available to the second Appraiser. Appraisers must answer many underlying questions that are not known by the homeowner. The underwriters have created a box in which the Appraisers must operate. This box is a standard that tells the underwriter if the loan is for a typical home or a home which is "atypical." The questions an appraiser must answer are, for example: are there single line adjustments over 10%; are there net adjustments over 15%; are there gross adjustments over 25%; is the land to value ratio below 30%; is Gross Living Area bracketed; are the comparables the most appropriate available; are the comparables within a reasonable radius; and have the comparables sold within the last six months. I could continue with other questions; however, what is most important is if the appraiser steps out of the box or exceeds these standards then the appraiser must explain why. If the appraiser has stayed within the box and has not exceeded these standards then there's a very good chance that you have an accurate appraisal. 

When selling a home many factors converge which ultimately determine what a home will sell for; i.e., the real estate company, the agent's marketing skills, a homeowner's urgency to sell, the time of year, type of occupancy (occupied, vacant, owner occupied, tenant occupied), available financing, luck, etc.. The more known factors the appraiser has, the more accurate the appraiser's opinion will be. If for example, you tell me your listing your vacant home with an agent and company not well known in the market and you've decided to sell your home in the middle of winter, my opinion may be different than if you tell me your listing your occupied home with a well known company with a veteran realtor and you have the entire spring and summer to market the property. Stated differently, the appraiser through "market extrapolation" will be able to determine what your home is "worth"; however, what your home is "worth" vs. what your home ultimately sells for is often controlled by outside influences that are not controlled by the Appraiser. From the evidence presented it's evident that what a home appraises for and what a home sells for may be two different numeric figures.