Property Valuation Pitfalls: Appraisals, ARV's, CMA's, BOV/BPO's & Internet Estimates.

How do you know what a property is truly worth? The market will generally tell you when you attempt to sell, but by then it's usually too late because you're already invested. There are many strategies people rely on when evaluating a property.

Appraisals

Let's start with appraisals. If you get a loan through a bank or hard money lender you'll probably be forced to pay for an appraisal, which is nothing more than a "third party" opinion of value. I put quotes around third party because they may not be directly involved in the transaction, but in many cases their bias and subsequent valuation can be swayed by pressure from the financial institution who hires them. This is because those institutions routinely order appraisals and the appraiser doesn't want to lose out on this consistent stream of income by being thought of as "difficult" or a "deal killer." I have had many appraisers ask me what the purchase price was and magically their appraisal ended up matching either that exact dollar amount or too close for it to be coincidence. Recently I vetted a deal that had a 2.1 million dollar appraisal within the last 6 months. That property subsequently sold for 500 thousand. How could the appraiser have been that far off? It's actually extremely common, especially if the property is anything besides a mid-range residential home. While I do think that appraisals can give some good information like pictures, descriptions, and comparable properties, the number is ultimately too inaccurate to use as a standalone valuation. This is why I don't bother ordering them when looking at a new investment property.

CMA's (Comparative Market Analysis)

While not always performed by a realtor, realtors often provide sellers a "CMA", which I would call a diet appraisal. Thorough realtors come take measurements and hunt for comparable homes that are true apples to apples comparisons, looking at homes in similar areas, square footage, amenities, and that have sold fairly recently or at least in similar market conditions. They also use their local knowledge, years in the business, and intuition to come up with an ideal value or at least a starting point for a potential list price. This makes all the sense in the world and I commend those hardworking realtors who care deeply for their clients and strive for accuracy. For every one of those rockstar realtors there are many more who are more motivated by the prospect of obtaining a listing or getting a quick sale than doing right by their clients. This tends to skew the valuation data high because they either want their buyer to believe the property is a good investment and worth much more than they are paying, or because they want their seller to give them the listing, knowing it'll never sell for that amount anyway. Some may then find dissimilar comps that support their price point or rely on software to do all their work for them. In any case, I'd put about as much stock into a CMA as I would an appraisal. In some rare but extreme cases (I've personally had 2 realtors try this on me) realtor's will attempt to charge a client hundreds of dollars up front to prepare a CMA and then "credit" them if they decide to list. I am very pro-realtor and have many friends in the business, but this tactic is just terrible. I'll look at CMA's if they are available, but don't go out of my way to obtain them. They can contain some good information that can be helpful in understanding a property's resale value but as a standalone valuation tool they are not solid enough for me to rely on.

BOV's/BPO's

Brokers Opinion of Value is widely considered a CMA but for commercial properties rather than residential, however, I've seen these ordered on residential houses, often without the broker going inside the home (for rental houses in particular).

ARV's (After Repair Value)

An ARV is not generally a document like a CMA, Appraisal, or BOV/BPO. These are instead just someone's opinion (often a wholesaler) of the value of the home once some renovation work is completed. The wholesaler has every motivation to inflate the ARV and underestimate the rehab cost. I generally find their ARV's to be inflated by 50% or more and the rehab budgets to be half or less of what it would really cost. At this point when a wholesaler tells me an ARV I don't even write it down. I would much rather look at an appraisal or CMA because generally there will at least still be some helpful information there.

Internet Estimates

You've probably seen"zestimates" or realtor.com values when looking at houses. They're just using available data points to estimate a home's value. These quick and dirty outputs are only as reliable as their incomplete data inputs. What I do appreciate about them is that they are generally unbiased, so while inaccurate, they're at least data driven, which is why I prefer them to ARV's but they are worth much less than a CMA or Appraisal.

Conclusion

I've done so many transactions in my decade long career and in so many markets that by this point I have a 6th sense for what a property might sell for. I'll still take a look at all available data including many of the aforementioned, but at the end of the day it's going to come down to my professional experience. This is one of the many ways I try and assist my property partners and JV clients. I can't tell you how often I've saved people from making terrible investments. This is one of the reasons I love what I do so much. If you don't have someone like me in your corner, the next best thing you can do is research your own comparable properties and look for sold properties, not ones that are currently listed.