Three different types of clients , one appraisal type.  Does this make sense?

Different user-clients have different needs.  Lenders need to know the potential for loss, to balance against the benefit of monthly payments.  Investors need to know what their potential income flow will be, and/or the probability of gain on sale.  Other clients, such as tax assessors and the legal system usually need to arrive at a fair value as between litigants.  (The eminent domain process is supposed to produce “fair” compensation to property owners when their property is taken by the government.)

The most common definition of value is promulgated by the Appraisal Foundation, a quasi-governmental agency which describes itself as “the nation’s foremost authority on the valuation profession.”  In Advisory Opinion 22, the main point is that “Market value means the most probable price” based on open market transactions.

The main problem is in the emphasis on “price”.  Price does not equal value.  So a “market value appraisal” is an opinion of price “based on whatever the ‘normal’ or ‘typical’ conditions are in the marketplace.”  Unfortunately, “normal” and “typical” conditions have caused or contributed to each of our recent massive economic turndowns.  This and similar value definitions bring on their own exaggerated market swings.  The last cycle caused tens or thousands of people to lose their homes, and presented the taxpayer with a nice bailout bill.

Each type of client-user type for appraisals has different needs.

Collateral lenders.  Lenders on real estate do not care much about upward possibilities.  They do care (or should care) about the risk of loss.  The losses have to be balanced against the returns of mortgage payments.  Unfortunately, the entire system tends to favor immediate commissions, bonuses, and profit margins.  It tends to disfavor long-term consumer, taxpayer, shareholder, and homeowner risk.

This definition of value is a point value.  This definition is an opinion.  This definition says nothing about downward risk – the probability of loss.  Nothing.

Investors.  Investors do care about potential for loss.  However, the reference point is a minimal (or expected) potential for gain.  The gain is either a stream of income, or it may be the potential for resale at a higher price at a later time.

Again, the current and predominant definitions of value also say nothing about potential for gain.  While market analysis is commonly used in income property appraisals, the only common element of forecasting is embedded in the DCF (discounted cash flow), wherein the appraiser projects or forecasts income flows, and a resale price some years into the future).  Even so, these projections and forecasts are based on the expectations of market participants (other investors) – not any basic or fundamental economic forecasting.

Equity agencies.  These are mostly government agencies and judicial bodies.  The goal is fairness or equalization as between two or more parties.  For most property taxation, the goal is fairness of the relationship as between properties and property owners, which may not necessarily reflect market price or fundamental value.

Often, in legal cases or government acquisition, the property at issue has no market.  For example, an encroachment of one property owner onto another.  There is no “market.”  In such cases the value to one party is quite different than the value (or damage) to another party.

Analytically the problem reduces to a simple question:  the distribution of risk.  Is it future upward, future downward, or some current distribution in the range of possible values?

Simply put, there is no point value which is “most probable”!  Let’s start there in serving our clients