Palumbo On USPAP is written by Joe Palumbo, SRA, a long time appraisal colleague and friend who is also an Appraisal Qualifications Board (AQB) certified instructor and a user of appraisal services. Joe is well-versed on the ever changing landscape of the Uniform Standards of Professional Appraisal Practice [USPAP].

…Jonathan Miller

Appraisal is far from a perfect science. My favorite line in USPAP is one I wish more appraisers and users of appraisal services would take note of. The comment to Standard 1-1 (c) reads:

>Perfection is impossible to attain and competence does not require perfection.

Over the past 12-18 months I have heard the current real estate climate described many different ways: depression-like, recession-like, anemic, soft and turbulent just to name a few. Suffice it to say that the national market is generally much less favorable than it was several years ago when the fraternity party atmosphere prevailed. Credit flowed like wine and all involved were happily attending the party. Buyers stuffed as much home as the could into “creative financing”, sellers cashed out or traded up and investors risk was mitigated by the rapid appreciation that even in a short time period paid dividends and made just about every deal worthwhile. The “you can’t go wrong in real estate” cliché’ became the staple notion.

One thing is for certain: today the market is clearly different.

For practitioners such as brokers agents and appraisers the normal market indicators are more important than ever. If these indicators are ignored or misread the likelihood of accuracy will fade. The good news is that what it takes to read and interpret the “good” market is also the same for the “bad” market: supply and demand, absorption, the principal of substitution and good old common sense. Unfortunately it seems as though some appraisers and realtors have forgotten about the basics. Existing supply of homes in relation to demand and in-turn local absorption rates are the foundation for existing market conditions. Coupled with price trending, absorption rates are the backbone of a good “micro analysis”, but it does not stop there. The principle of substitution is fundamental in determining what options exist for buyers in your market. Historical data (closed sales) is relevant to confirm trends and extract adjustments, but the recent and more current indicators of active and pending sale data is where the gold is.

It seems to me that this is not so much a real estate principle as it is common sense The reason is simple: why would a buyer pay your estimated ANTICIPATED SALE PRICE for the subject property when a less expensive alternative exists? Maybe you’re in a sub-market that does not yield a lot of very “truly” comparable listings, still if these are the only alternatives the market sees than it is all relative. Although ERC guidelines do not call for “adjustment” of competing properties, it can be a sound practice as a high benchmark “check” and some relocation companies have asked for such. The trend of requiring and adjusting listings is also becoming more common place in the lending environment.

Clearly the times have changed. As they say though, “the more things change the more they stay the same”.

At Weichert Relocation Resources Inc, we require that the competing listings be adjusted. For the most part our appraiser panel is diligent and understanding in that exercise. I have been personally involved in cases where it is evident that this very basic concept is misunderstood. On those few occasions when I have questioned appraisers whose final value is well above all adjusted listings, I have received responses that concern me very much. “They are just listings” I am told or “they have not sold so they mean nothing”.

They mean nothing? Actually, they mean something: that you, the appraisal professional do not clearly understand the principle of substitution.

Believe it or not football can be like real estate. No matter how complex the situation is winning a game can come down to the execution of the very basics: blocking tackling and passing.

I had a mentor who once told me “don’t be smarter than the market, let it tell you what is happening”. I have tremendous confidence in the appraisal profession. I see hundreds of appraisals via my current job responsibilities and speak with hundreds of students giving classes. Sometimes you have to offer something other than pearls of wisdom to make an impression so I will offer no such thing here. Just a plea to my fellow appraisal professionals: get back to the basics in real estate appraisal: the principle of substitution, your block tackle and pass concept.


  1. Edd Gillespie July 21, 2008 at 9:49 pm

    It looked like perfection or the lack thereof was going to be the topic. And I have some thoughts on that when it comes to enforcement and review, but you switched to the theory of substitution.

    Your suggestions to use actives and pendings in appraising a declining market are sound and helpful. Tell me would you extend the reasoning to require the cost approach? It seems to me if the theory supports the relevance of the cost approach then home dwellers wouldn’t build until the going price of existing inventory meets or exceeds the cost of building. That hasn’t happened anywhere around here in memory and new houses are still popping up.

    And please, since you are requiring adjusted actives and pendings, put the capitalisticly efficient theory of appraiser substitution aside, be fair to your appraisers, offer them longer turn times and pay them more as well.

    If you lead the way, someday maybe clients will agree to pay and wait for sound market analysis along with adjted actives and listings. Assuming of course that the industry chooses to educate appraisers to analyze markets.

  2. Joe Palumbo July 23, 2008 at 11:21 am


    Not sure how familar you are with the Relocation Industry and the form used to report that analysis. The listings were required to be there (20 years ago) so the adjustment of such is no big deal.

    I do not feel that A Cost Approach would assist us better in achieving accuracy than the market indicators, but understand your question.

    As for the time and the payment I have been here for almost 2-years. We pay “whatever” the invoice states and do not have a “set-fee”. Of course we request a specific turn-time but also allow for flexibility . To date I have not heard from ANY of our 4500 appraisers that we ask fior too much and pay too little. Frankly I am not sure why you assumed that: maybe because it is pervasive in the industry?

  3. Edd Gillespie July 24, 2008 at 8:58 am

    You sound like a client to be coveted. I assumed what I did exactly for the reason you cited. This profession will not make the progress it must make until the practitioners in it become professional. An essential ingredient of professionalism is a respectable wage. It boggles my mind why anyone would want an expert opinion from a professional who works for little more than minimum wage if he is taking the time it takes to d his job well.

    But then I know the appraisers who are doing the fast and cheap are not working for minimum wage. They make it up in high volume and crank out two or three form assignments per day. I think the clients for the most part love it an expect it.

    I can only hope your philosophy becomes the rule rather than the exception it now is.

    As for me, I have completed some relocation assignments. The fee was better than some, but I cannot understand the merit of comparing appraised value to a BPO so I don’t pursue relocation as a serious segment of my job.

    Thanks for the response. Does your firm take BPOs seriously?

  4. Joe Palumbo July 24, 2008 at 8:06 pm

    THE BPO’s are a data-points,,,and they indicate price not value so explaning the difference is not that hard.

    We take the BPO as seriously as we need to and recongize the “tool” they are rather than state they are no good period.

  5. Edd Gillespie July 24, 2008 at 8:45 pm

    Hmmm. I don’t think I understand what you are saying.

    My experience with relo companies has been that their representatives who deal with the appraiser pretty much require close parity between BPO price and appraised value. They insist on parity to the point of striking enmity between the appraiser and the agent.

    My thinking is that a BPO is an agent’s opinion of how much they can sell the house for. Mike in another post prefers his appraisal in place of a BPO for listing. Can you tell me what the practical difference between BPO price and appraised value is?

  6. Edd Gillespie July 25, 2008 at 12:05 pm

    Not often have I heard price of real estate distinguished from value, and I don’t quite understand their difference. I do know that BPOs are often very cursory in their devlopment and conclusion.

    I think or the most part in appraising real estate, appraisers apply the economic theory that value is expressed as price.

    I suspect that rather than distinguishing te result of a BPO from that of an appraisal by saying one is value and the other is price may not be easy to explain. Perhaps differences in technique, depth of development, experience, motivation and perspective should recieve the emphasis.

    It may be that distiguishing price from value results in a difference without substance.

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