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By Dan Harkey
Real Estate & Private Money Finance Consultant
m: 949 533-8315  | e:

There are multiple methods for determining a property’s value, including market value and appraised value. There are also numerous definitions of value conclusions depending on the purpose of the appraisal assignment and the intended use. But original purpose and actual use may be different, as noted in appraisal examples # 1 and # 2 below.

How is Market Value Determined?

The actual definition of market value means the most probable price for which a property may be sold in a competitive and open market. The realtor’s job is to develop a market value estimate to sell the property on the open market. The realtor will evaluate a proposed listing price based on their experience and familiarity with the local market area. With that information, the realtor will complete a comparative market analysis (CMA), including data from closed sales, pending sales, and available listings. The realtor will adjust the value conclusion for amenities, location, quality, and views.

A listing price will be affected by sellers’ motivation and knowledge, including input from their agents, which are generally subjective.

Conditions include:

  • A fair sale.
  • Willing buyers and sellers to act prudently and knowledgeably.
  • Assuming the price is not affected by undue influences.

“The listing price will be affected by sellers’ motivation and knowledge, including input from their agents, which are generally subjective.”

How is an Appraised Value Determined?

An appraiser will take an assignment to establish an estimated value based on the following:

  1. Comparable closed sales (sales comparison approach)
  2. Replacement cost estimate (cost approach)
  3. Income approach (capitalization approach for income-producing properties.
  4. Rent surveys are also needed when determining income property values.
  5. Some appraisers will include pending sales and available listings when similar comparable are challenging to find.

Market value and appraised value may be the same or substantially different.

The appraiser has a different task from the realtor to identify objective closed transactions as comparable(s). They will consider all property characteristics to establish an estimated value conclusion.

How do Distressed, Non-Arm’s Length, and Foreclosures Impact Appraised Values?

The appraiser should skip distressed property sales and non-arm’s length sale transactions. A distress sale may be with a buyer who enters a contract to purchase a problematic property. Short sales are generally priced substantially below the market. The bank may be facing a financial loss (haircut) below outstanding principal, accrued interest, arrearages in property taxes, and homeowner association dues.

Foreclosure sales are generally priced below the market. A foreclosure sale and a short sale may be the same transaction. Purchase offers will need to consider the occupancy requirements and removal of the principal owner who is being foreclosed. The foreclosing lender has the same consideration plus any other outstanding liens and encumbrances that may be senior to their loan. There may be none.

A seller, subject to a foreclosure procedure, may list a property for sale with a realtor at an amount less than the outstanding balances of all liens and encumbrances. An offer to purchase will be subject to negotiating a lower payoff amount with the lender.

A non-arm’s length sale transaction may be between family members, personal friends, or business associates and be discounted to a below-market price because of the close relationship. I would refer to this group as “related parties.”

Uniform Standards of Professional Appraisal Practices (USPAP)

Most appraisers are trained to use Uniform Standards of Professional Appraisal Practices (USPAP), as adopted by Congress in 1989. The publication is an industry source promoting quality control standards applicable to real property, personal property, intangibles, and business valuation reports in the United States territories. The publication may be obtained fromThe Appraisal The Appraisal Foundation is the governing body for the appraisal industry.

The USPAP manual is an excellent reference resource that may be used by mortgage professionals when considering a value of a property and in deciding whether there is a need for a review of an existing appraisal.

The practice of USPAP standards and the resulting estimate of value may be flawed, not because of USPAP, but due to an appraiser’s negligence, incompetence, ignorance, or intentional deceptions. When an appraiser engages in a departure or deviation from a prescribed standard, the result may be a worthless and deceptive pile of paper. Based upon what the principal needs some negligent appraisers will “back-into” the estimated value conclusion. “What value do you need, and I will figure out how to get there?”

I have observed hundreds of examples where the written appraisal is flawed. Appraisers vary significantly between highly competent, marginally competent, incompetent, and just plain deceptive.

Insurable Value for Property Insurance Purposes:

Lenders will usually require replacement cost insurance coverage to make the loan. Calculations for insurable value are usually for replacement cost if the structure is destroyed. The appraiser will calculate the cost estimate to rebuild using current materials and conforming to existing building and zoning regulations for a rehabilitation project. The cost of these upgrades will be multiple times higher from 40 to 50 years ago.

The land value is segregated from the structure since the ground will not burn down. The appraiser will also calculate the replacement cost of outbuildings and appurtenant structures. For replacing cost coverages, the appraiser will estimate the cost to rebuild. The appraiser will also calculate the replacement cost of outbuildings and appurtenant structures.

Additionally, the insurance company will provide coverage for outbuildings and personal property. The actual insurance company has a matrix for replacement cost calculations.

“Actual Cash Value”:  Insurance policies should be mentioned because they exist. The market cash value for used stuff today is pitifully low.  An insurance policy that is actual cash value covers losses at depreciated value rather than replacement costs. If an insured loss occurs, the insurance adjuster will calculate replacement cost and subtract depreciation for age, wear, and tear. A policy payout for a loss or damage will be substantially greater for “replacement cost coverage,” instead of “actual cash value coverage.” The amount of premiums saved for the lessor quality coverage is not worth it.

Appraisal for property tax assessments: municipality assessed value for taxation purposes. Assessed valuation approaches have distinctly different requirements for establishing value and should not be considered interchangeable.

Proposition 13: California Constitution

In some states, such as California, assessed values are limited. Proposition 13 was an amendment to the California Constitution, approved by the voters in 1978. Prop 13 was Tax Revolt and massive win for the taxpayers. Now the State wants to take proposition 13 away by first, using a split-roll strategy that would apply to commercial properties only.  Later comes single family homes

Proposition 13 made constitutional changes resulting in a limitation on raising property taxes passed to the benefit of property owners:

  1. Requires that properties be taxed at no more than 1 percent of their full cash value shown on the 1975-1976 assessment rolls and limit annual increases of assessed (taxable) value to the inflation rate or 2 percent, whichever was less.
  2. Upon the transfer of properties, allow them to be reassessed at one percent of their sale price and reset the limit on annual increases of assessed value.
  3. Prohibits the state legislature from enacting new taxes on the value or sale of properties.
  4. Requires a two-thirds vote of the state legislature to increase non- property taxes.
  5. Requires local governments to refer special taxes to the ballot and require a two-thirds vote of electors.

Their first attempt was California Proposition 15 (2020), which would have added additional taxes on commercial and industrial properties for the benefit of education and local government funding.  It Failed! Never fear; California leadership will continue to work diligently to undo Prop 13 because there is a vast storehouse of fresh new cash for the government to tax (confiscate) from property owners.

Tenants are not naive because raising taxes would be transferred by higher rents. Also, homeowners were on board with the rejection because they understood that the next step to increase property tax would be them. In that case, a significantly large number of homeowners would not be able to afford to stay in their own homes and will be forced to sell. Massive numbers of distressed sellers lead to an enormous drop in home values. Hallelujah, for public awareness.

State leadership will never give up. They will be back for a second bite at the apple. Their prize is all tax money to pay for useless or semi-useless programs that would appeal to non-taxpayers and non-property owners. Public employees could also use a fat 100% wage raise per annum to shore up their fat pension system reserves, couldn’t they? Of course. I am being facetious. Treating seriously painful issues with deliberately inappropriate humor eases the pain.

Variables that Contribute to Property Value:

Many variables contribute to a real property’s current perceived value. A few of these variables include:

  • Location
  • Property condition
  • Property age
  • Functional and economic obsolescence
  • Interior and exterior amenities
  • Pool
  • View
  • Hardscape and trees
  • Noise
  • Site variables such as topography, ingress/egress
  • Garages
  • Appurtenant structures
  • On-site vs. off-site parking
  • Access to utilities, above-ground vs. below-ground electrical and telephone lines in the neighborhood, etc.
  • Zoning
  • Property setbacks
  • Architectural style
  • Land parcel size

When the property values accelerate due to inflation and lack of inventory, the market value conclusion may be concluded upward.

It is not unrealistic to expect a 5% value differential between two different appraisers. Good judgment comes from bid experience. Bad judgment comes from bad decisions.

A prospective buyer and the buyer’s agents can assess all the above characteristics, including their family circumstances, motivation to own, timing needs, and the availability of affordable financing. Affordable finances are a big factor.

Property values ascend or descend based upon market conditions:

Property values may go up, down, or remain static for years. Here are a few variables that contribute to the rise:

  • Limited inventory, which may cause multiple offers and bid-up prices.
  • General inflationary pressures.
  • Financing is exceptionally favorable.
  • Taxation for property tax and state income taxes are fair.
  • Neighborhood and surrounding community are developing.
  • The business environment is favorable, with many small businesses doing well.
  • School districts are excellent.
  • Medical facilities are extremely high quality.
  • Large employer(s) are arriving in town.
  • Quality of life is considered superior.
  • Neighborhood green belt corridors and open space are abundant.

Variables that contribute to declining values: Variables are almost the opposite.

  • Inventory of homes rises to the point where some owners will discount their prices to sell the property.
  • Inflation of property values causes borrower’s lack of affordability.
  • Financing is beginning to tighten up as interest rates rise. Interest rates will increase significantly over what they are today.
  • With rising interest rates comes a lack of affordability.
  • Prohibitive government intervention in ownership rights
  • Prohibitive regulations and fees attached to new buildings including rehabilitation of existing buildings.
  • Some state governments, such as California, are now contemplating a punitive tax of 25% of a property owner’s net profit.
  • Property tax and income tax become onerous and therefore unaffordable.
  • Neighborhood crime and blight.
  • Large employers are leaving, and small businesses are closing.
  • Standards of living become prohibitive, and therefore people are moving away.

No one has a 100% clear crystal ball about the future of real estate investments.  Will values continue to go up? Or will values go down, and if so, how much? Governments always manipulate markets in their favor which is seldom in the public’s best interest.  Inflation and devaluation of worldwide currencies have been around for thousands of years. The Federal Reserve Banking System has driven inflation and dollar devaluation in the U.S. since 1913. Unlimited Injections of fiat currency into the financial system cause inflation and dollar devaluation.

Discussions about how much property values may rise, or fall can be subjective, and we have all watched valuations go up and down for those who have many decades of experience in the real estate business.

Example of a flawed appraised value result:

Two different appraisers cannot be correct when each appraisal is vastly different.

A mortgage broker/lender received a call from another mortgage broker who represented a prospective borrower requesting a loan on a property in Malibu, California.  The borrower’s broker presented a completed appraisal made out to a law firm for a property settlement in a divorce between the prospective borrower and an ex-husband.

The ex-wife wanted an exceptionally high value estimate because she thought that it would force a higher divorce settlement.  Her appraisal was not arm’s length but ordered for the specific purpose of negotiating a better financial settlement for herself. Go figure; Is there greed and deception in the world?

But the actual use of the appraisal turned in a different direction. She submitted the appraisal to a lender for a proposed loan on her property. The appraisal document had a condition that only the principal party may rely on the contents of the appraisal. All appraisals have the limiting condition. A subsequent lender is not the principal and therefore could not rely on the contents of the appraisal.

The mortgage broker/lender explained to the prospective borrower that a Lender could not accept a non-arms-length appraisal when the purpose was other than to establish a fair market value.  Most lenders with four quarters and a dime (1.10 cents) of intelligence require independent third-party licensed appraisals.

The independent third-party appraisal came in substantially below the appraisal that was ordered for the divorce proceeding.

The broker/lender refused to originate this loan because of the potential legal predicament between questionable value and a jerk-of-a-borrower. The borrower had hissy fits, emotional tantrums, and threatened legal action.  Whenever a borrower threatens legal action, most brokers/lenders will decline to originate the loan.

Appraisal #1 – MAI designation-ordered by the borrower for a divorce proceeding.

The subject property was a 19-acre parcel in a semi-rural setting with a lovely home, barn, corrals, and outbuildings, all for horses and livestock.  The property also contained 10 acres of avocados grown for resale.

Borrower’s appraisal: the borrower (ex-wife in the middle of a divorce proceeding) submitted an appraisal report from an MAI licensed appraiser. His value conclusion was $3,400,000. The borrower must have pressured the appraiser to increase the estimated value.

Most comparable closed sales were more than 1.25 miles south of the subject property in a neighborhood of custom homes with terraced custom lots, all with dramatic unobstructed ocean views.

The value of an unobstructed ocean view in a custom home neighborhood is exceptionally high.   The comparable(s) properties used in the appraisal were far more desirable.

Appraisal #2 – Certified General Appraisal ordered by the Lender.

Lender/Brokers appraisal: The broker/lender who was processing the prospective loan transaction and engaged a licensed general appraiser ordered and received the appraisal. The appraiser submitted a value estimate of the value of $1,400,000. The report was considered an unbiased third-party report that the broker and lending principals could rely on.

The appraisal used comparable(s) that were similar in nature to the subject property. Since the subject was in a semi-rural location the ocean views were somewhat distant.

The appraiser only considered comparable(s) of ranch style homes Malibu, Ca, with distant ocean views.  The subject property was a mile from oceanfront.


Licensed mortgage brokers/lenders are not appraisers, but they have a fiduciary obligation to protect the interest of their principal clients.  The borrower’s broker is a fiduciary of the borrower.  The lender’s broker is a fiduciary of the lender. In some cases, a dual agency may become an issue when a broker represents both the borrower and lender.  Fiduciary laws vary in different states.

A broker/lender should hire competent third-party licensed appraisers familiar with the property type and the area.  Also, they should make sure that the appraiser is at arms-length with no pressure from the borrower to increase the value artificially.

This article is intended for educational purposes only and is not a solicitation.

© Dan Harkey. This material’s unauthorized use or duplication without express and written permission from this author or owner is strictly prohibited. The article may be used in marketing efforts, provided that full and clear credit is given to Dan Harkey. The credit displayed when you forward any article must include Dan Harkey, Business & Finance consultant. You are not authorized to modify the articles title or the content.

This article is an overview for a general educational purpose only.  The information presented should not be relied upon without the advice of counsel.

Dan Harkey is a contributing author to Weekly Real Estate News and is a Business & Financial Consultant. He can be contacted at 949-533-8315 or