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  • Writer's pictureE. James O'Malley - Certified General Appraiser

"Appraisal Fees: Why Quality Matters More Than Cost"

When it comes to estate planning, the process can be complex and emotional, especially after the passing of a loved one. Executors, trustees, and family members often seek expert advice from legal counsel and accountants to navigate the intricate web of estate taxes and property distributions.

Among the critical steps in this process is obtaining a date of death appraisal—an opinion of value that significantly impacts estate taxes and property distributions. Your estate planning attorney or your accountant have likely recommended an appraiser whose work they have vetted for quality, if not, they may have simply told you to go ahead and find an appraiser on your own.

Regrettably, this can seem overwhelming, especially if the appraisal is related to the recent death of a family member. You may find yourself in a position thinking should I just go with the appraiser the attorney (or accountant) recommended or should I spend some quality time looking for a suitable appraiser?

In this blog post, we'll delve into why prioritizing a thorough and well-supported appraisal is paramount, even if it means investing a little more upfront. After all, the accuracy and reliability of the appraiser's opinion of value can have lasting implications for financial outcomes.

Navigating the Maze of Appraisals: Making Informed Choices

In my personal view, and this is solely my perspective, if your legal counsel or accountant has not yet suggested an appraiser, it might be worth considering why not. Most private individuals are not accustomed to reviewing appraisals and even if attorney’s or accountants are not real estate professionals themselves (in most cases), they have likely come across substantially more appraisers and appraisal reports than the average person.

That said, if they did refer an appraiser or even a few appraisers, the chances are that those appraisers have already submitted work that was deemed at least acceptable and of decent quality.

You call the referred appraisers and you receive a range of quotes. You start to think, I’m already paying thousands in legal and accounting fees for all the other estate related things, the last thing I want to do is overpay for my appraisal. So you start calling around other appraisers and the next thing you know you have five more fee quotes, but the most attractive one is $250 less than all the others.

You think to yourself, “an appraisal is an appraisal” and I’m saving $250 dollars. This scenario plays out all the time, and it’s unfortunate, because the reality is, if the average quote you are receiving is $600 and you receive one quote of $350, that is typically the beginning of several red flags. Unfortunately, the bargain hunting way of thinking, at least with regards to choosing an appraiser, is among the least prudent methods.

While fees across the country may vary, in the San Francisco Bay Area, the fee of $350 barely covers the costs of producing that appraisal. Why would an appraiser accept such a low fee? There are a plethora of reasons, some of them compounding.

Could be the appraiser is newly licensed and is trying to grow their customer base. It can be difficult to get steady work, even from lenders, when you’ve been licensed for under five years. Or, the appraiser may utilize a trainee to perform most of the work so they can concentrate on higher paying assignments. Or, the appraiser is lacking in workload and needs any job they can take.

You may be asking “what a pessimistic and negative viewpoint...all your reasons are negative.” Why can’t the appraiser just be offering a great deal? The most transparent and truthful answer is because appraisers (especially in the Bay Area) can’t survive on such low fees without cutting corners in some manner. This could be in the quality of work or the amount of time dedicated to the appraisal. Whatever the reason, the chances are lower that you are getting the same quality of appraisal from those appraisers who quoted around $600 for this particular assignment.

The Power of an Accurate and Thorough Appraisal

Since we are on the subject of date of death appraisals, we’ll focus on this appraisal type. However, quality appraisals are paramount for whatever the intended use. A date of death appraisal isn't merely a formality—it's a powerful tool that determines the fair market value of a property at the time of a person's passing. This value becomes the basis for calculating estate taxes and distributions to heirs. A meticulously and thoroughly conducted appraisal ensures a more reliable and credible property valuation, preventing overpayment of taxes and ensuring fair distributions.

Quality Over Cost, A Wise Investment

In the realm of appraisals, prioritizing quality over cost is essential. While it might be tempting to opt for the lowest fee quote, remember that the value of a thorough appraisal extends beyond its price tag. By choosing an experienced and reputable appraiser, you're investing in the accuracy and reliability of the appraisal's findings. Saving a few hundred dollars on the appraisal fee could pale in comparison to the potential thousands of dollars you might end up paying in excess taxes due to an inaccurately assessed property value.

Appraisals as an Inexpensive Insurance Policy

Think of a date of death appraisal as an affordable insurance policy for your estate. The cost of a high-quality appraisal pales in comparison to the potential financial repercussions of an inaccurate opinion of value. By paying a little extra for a well-supported appraisal, you're safeguarding against costly errors and ensuring your estate's tax liabilities are accurately determined.

The Potential Impact of Low Appraisal Fees on Quality

Recent studies highlight the correlation between appraisal fees and appraisal quality. A study published in the Journal of Real Estate Finance and Economics in 2017 found a negative correlation between appraisal fees and appraisal quality. Lower fees were linked to higher chances of errors in appraisals. Similarly, a 2018 study in the Journal of the American Real Estate and Urban Economics Association found that appraisers paid lower fees were more likely to overvalue properties. An article in Working RE Magazine titled “Low Bid Appraisal Ordering and Its Effect on Quality”, discusses how many AMC (Appraisal Management Companies) use a low-bid appraisal ordering system that sends out email blasts to appraisers, offering low fees and short turn-times for appraisal assignments. The article argues that this system leads to lower quality appraisals, as experienced and diligent appraisers are often outbid by appraisers who are willing to cut corners and produce “shoddy” work. The article also points out the negative consequences of such a system for the AMCs, the lenders, the borrowers, and the appraisal profession as a whole. The article further cites appraiser’s and their personal experiences dealing with clients who value “fast and cheap” over quality and risk management. You might be thinking, “but I’m not an AMC or a lender”. Maybe not, but the strategy of shopping around for the lowest fee quote without placing more emphasis on the experience of the appraiser and familiarity with the type of property being appraised, will lead to similar issues, including but not limited to, appraisal revisions, appraisal reviews, a poorly supported opinion of value, and possibly a whole new appraisal, all which can result in additional appraisal-related costs.

Real World Scenario

You may be asking, well what experience do you have to support your opinions regarding low cost appraisal work?

Answer: Decades of appraisal work for conventional and private lending, estate planning related work, divorce, intra family disputes, and appraisal review work. I’d like to share a story that plays out more often than I would like. Due to federal, state, and other appraisal regulations regarding confidential information, I can only share so much information regarding specific appraisals. However, I can provide you with a fairly recent real-world example. Note that the values and the exact situation were slightly altered to preserve privacy.

To illustrate the impact of quality appraisals, let's dive into a real-world example. In late 2022, a prominent estate planning attorney contacted me about a property left to two siblings—a single-family home in the Sunset District of San Francisco. One sibling could afford to purchase the home and wanted to keep it in the family, while the other hoped for a substantial payout.

If you’re familiar with this market area, you may be aware that there are thousands of very similar homes. As such, there was ample sales data from which to produce a reliable and strong analysis. However, the specific issue among the siblings and their respective appraisals was that there was a $400,000 difference between the appraised values. When dealing with custom homes or very high value market areas where median home values are above $3.5 million, this difference in values could be more understandable. However, in the subject’s sub-market segment, this is concerning. My first thought revolved around incorrect perception of the subject characteristics and those of the appropriate comparables. What I discovered was more concerning.

Per request of my client’s attorney, my client, along with her brother's cooperation, I was contracted to produce a third appraisal. In doing so, my client also freely provided me with the previous two appraisals to review. Receiving previous appraisals is not atypical; however, an appraiser should be cautious to not allow those appraisals to inadvertently bias their own appraisal. However, that was the least of my concerns, given what I learned once I started my reviews.

Appraisal #1:

Upon receiving the first appraisal, we discovered immediately that it was developed using the incorrect format. To clarify, conventional residential appraisals that are ultimately tailored to comply with Government Sponsored Enterprise (GSE) regulations and formats, are completed on forms required by FannieMae and FreddieMac. This form employs what is known as the Uniform Appraisal Dataset (UAD).

A UAD-based appraisal report, designed primarily for conventional mortgage lending, follows specific standards set by Fannie Mae and Freddie Mac. It is not suitable for private individuals due to its focus on standardized data for mortgages and for ease of information collection. On the other hand, a General Purpose Appraisal Report (GPAR), which the appraiser should have utilized, provides more flexibility, allowing appraisers to better tailor their appraisals to individual needs, such as estate planning, legal matters, or personal information. GPAR forms better suit non-lending appraisal purposes and offer a more comprehensive analysis that meets the specific requirements of private individuals. The form can be filled out using language that is more easily understood by non-real estate professionals.

Regardless of the data utilized in the report, the first mistake this appraiser made was employing UAD appraisal form format for a non GSE related client. It is not uncommon for appraiser’s to inadvertently utilize this form type; however, there is language in these forms that do not apply to non-lending related clients, which can be misleading or confusing, and some would argue is a violation of USPAP (Uniform Standards and Principles of Appraisal Practice).

Further, the UAD form specifically states in the form under Intended Use:

URAR Intended Use Clause
Excerpt from URAR Certification

According to FannieMae and FreddieMac “Altering the certifications could be considered fraudulent and could result in disciplinary action or legal penalties.” That said, altering the preprinted language in the certifications contained in the UAD form, may result in legal ramifications. So essentially, using this form for a non-mortgage related purpose, could be considered misleading and a violation of USPAP.

*For the legal professionals reading this blog, our firm was contracted to provide litigation support (via appraisal services) concerning a case that involved two appraisals for asset dissolution purposes (divorce). In short, the legal team relying on the appraisal produced with the 1004 UAD form did not have a good day in court.

If you’re not familiar with USPAP, it is a set of guidelines and ethical standards that govern the work of real estate appraisers in the United States. It outlines the rules and principles appraisers must follow when assessing the value of properties. USPAP ensures consistency, accuracy, and fairness in property appraisals, promoting trust in the appraisal profession and protecting the interests of clients and the public. Appraisers are required to adhere to USPAP to maintain their professional integrity and credibility.

To make matters worse, the appraiser utilized the specific codes required by these forms that are not easily interpreted by laymen. Further, they did not include the required UAD Definitions Addendum, which serves as a cipher of sorts so that one can translate the codes utilized in the appraisal. As such, the client could not easily translate these codes, which one could argue does not “promote the public trust”. If you enjoy tedious and boring reads, you can review FannieMae’s FAQs document on the UAD here.

Use of the 1004 URAR UAD form is simply inappropriate for use in a private appraisal. What this tells me is the appraiser is either a novice, is unfamiliar with more recent appraisal regulations, was careless or possibly lazy, and likely assumed that the client would just accept the value and move on. Other than the form type issue, the comparable data was average, but there was superior data available. The appraiser provided an extremely brief description of their comparable search parameters and merely stated what the various adjustments were, with no other explanations as to why or how they determined those adjustments were appropriate.

Appraisal #2:

The second appraisal, provided by the brother, was completed on the more appropriate GPAR form, and at a quick glance, appeared to be a higher quality appraisal with the exception of one major flaw. Every single comparable sale utilized was superior to the subject, and there were only three comparable sales utilized. To add perspective, without adding additional addendums to the appraisal, the form allows for up to 15 comparable sales.

To add more context, the subject was legally a two-bedroom and one bath home over a large two-car garage. It is common for homes in Sunset and Parkside market areas to have either unwarranted or permitted living areas behind the garage on the street level; this typically results in losing one of the two tandem garage parking spots.

In this case, the subject had no lower level finished area and the garage was able to accommodate two cars. Two of the comparable sales in this appraisal had unwarranted lower levels; however, those lower levels were finished with similar quality finishes and appointments as the main (original) level. The third comparable was an identical floor plan home as the subject, with no finished lower living area, but was substantially remodeled with high-end finishes.

The problem? There were no inferior comparable sales to provide a value range perspective. Another mistake the appraiser made in this case was that they simply stated “no value was applied to the unwarranted living areas of the comparables” without explaining why it was deemed not necessary. Neither did they make any adjustment for difference in garage parking spaces, which is typically warranted, as street parking in the Sunset/Parkside areas can be especially challenging.

Appraiser’s that are experienced in working the Sunset and Parkside markets, understand that factually speaking, many buyers in the Sunset and Parkside market area do place additional value on unwarranted lower living areas, even if a lender doesn’t. This is especially true if the finished lower living area exhibits good craftsmanship and high quality finishes and flows easily with the main living area (internal direct access without having to enter the garage first or exit the structure and enter from the outside). Further, buyers in this market are more willing to accept these unpermitted areas for several reasons. According to seasoned local brokers, competition among buyers has been fierce for years now, even in the current market with interest rates hovering around 7.0%, buyers are submitting competitive offers, above asking, with no contingencies.

The fact that the comparable sales were not ideal was not the only issue. The other issue was that the effort attributed to comparable selection was especially poor. When we conducted our own comparable search for our appraisal, it was evident that there was a plethora of comparable sales nearly identical to the subject in characteristics, and at least five that sold within two blocks, and within two months of the effective date of value.

Given the appraiser of appraisal #2 was based in San Francisco, and had held their license for more than 20 years, one might easily arrive at various conclusions as to why the appraisal (that was performed for the brother who was anticipating a buyout from his wealthier sister), may have either purposely or unintentionally been developed in such a manner that resulted in a much higher value opinion. Now, given that appraisers are required by law to be objective, unbiased, and obligated to maintain the public trust, I would prefer to assume this appraiser simply rushed through the assignment without spending an adequate amount of time on the comparable research or that they may have had a trainee complete the assignment without thoroughly reviewing the completed appraisal.

Seeing as the situation between the siblings was somewhat contentious, when conducting my appraisal report, I felt it prudent to fully explain the nuances of the market area, value trends in the subject’s sub-market segment, and buyer preferences and actions noted in interviews with local market participants. The comparable search criteria was thoroughly explained, including why certain comparables were not considered for analysis. The rationale and support behind the adjustments were thoroughly explained and supported. Last but not least, it was completed on a GPAR form with supplementary narrative addendum.

How did this story end? Well, my opinion of value leaned toward the lower end of the range indicated by the previous two appraisals. The difference this time around was that both siblings expressed confidence in my analysis and the resulting opinion of value.

Nevertheless, the brother insisted that a 50% buyout based on my opinion of value was insufficient, and that he’d benefit more from having the property sold on the open market. The property listed within the month, and the asking price was $200,000 higher than my appraised value, and about $300,000 above the list prices of the comparables utilized in my appraisal. Despite this, the property entered contract within eight days with a multiple offers, the highest of which was $50k over my appraised value. This is especially important to note, as the majority of similar sales were selling between 111% and 123% above asking. Given market conditions hadn’t changed much, and based on my knowledge of the subject and the comparable data, a purchase price near asking tells me the asking price was likely inappropriate and led to fewer offers as opposed to the reason being something related to the subject property’s characteristics or condition. This opinion is further supported by the fact that many of the comparables I utilized in the appraisal listed with asking prices between $50,000 and $150,000 below the starting asking price of the subject property.

A final note regarding this story, interestingly, both of the previous appraisals provided included the appraiser's invoice, which is not required for private appraisals in the State of California. The fee for the first appraisal, in which the inappropriate UAD forms were utilized, was $500. The fee for the second appraisal, which utilized the correct GPAR form but lacked in quality comparable sale data and transparency, was $400. The lower fee assignment resulted in the inflated value. Where have we heard of that issue before? (Hint: see previous section labeled “The Potential Impact of Low Appraisal Fees on Quality:”)

What's the moral of the story? Pay for quality work the first time around. Since the previous two appraisals did not promote confidence, the siblings ended up having to pay out over $1,000 including my fee for the third appraisal. If they had paid a reasonable fee in the first place, like the $600 average quote they were receiving from most appraisers, they might have received a better quality appraisal from the start.

The benefits of paying for quality appraisal work impact other things as well. Sticking with the subject of date of death appraisal, below we address how appraisal quality and accuracy impact other costs.

How poorly conducted appraisals can result in other issues

In some cases, an individual's total estate would not be subject to federal estate taxes, regardless of the accuracy of the appraisal value. However, there are still reasons why accurate appraisals matter, such as potential state estate taxes, beneficiary distributions, capital gains taxes, records/documentation, and legal/accounting advice.

Overestimation of the property value results in higher tax liability than necessary, while underestimation leads to potentially lower tax liability. It's important to underscore that accurate appraisals are vital for proper estate tax calculations, especially considering the individual exemption limit.

Capital Gains Taxes: If the heirs eventually sell the inherited property, the accuracy of the appraisal will affect the property's stepped-up basis for capital gains tax purposes. An inaccurate appraisal could lead to higher capital gains taxes upon the sale.

Records and Documentation: Accurate appraisals provide a clear record of the property's value at the date of death, which can be important for legal and financial purposes, including potential future audits.

Beneficiary Distributions: Even if estate taxes are not applicable, an inaccurate appraisal can still impact the fair distribution of assets among beneficiaries. A low appraisal might result in unequal distributions or disputes among beneficiaries. Unfortunately, this scenario occurs more often than one might think. The previous real world scenario is just one example. We have been hired on many occasions to produce an appraisal solely to settle a dispute among beneficiaries.

Choose Quality

In this blog post, I've shared my perspective based on decades of appraisal experience, highlighting the importance of quality appraisal work in estate planning and the potential consequences of low-cost appraisals. I've also presented a real-world scenario to illustrate the impact of inaccurate appraisals on property valuations and, ultimately, financial outcomes.

Prioritize accuracy and thoroughness in your valuation requirements. Calling around to obtain multiple quotes and then selecting your appraiser or appraisal firm on the lowest price quote could end up costing you more money, more time, and more headache in addition to any tax implications.

The next time your attorney or accountant directs you to obtain an appraisal, ask them who they’d refer you to and ask them why? Notably, over 70% of our assignments stem from referrals from estate planning attorneys and accountants who are familiar with our work. Our livelihood depends on these referrals. A good appraiser, who is referred by an attorney or accountant will not only be thinking about how to provide excellent service to their client, but they will also be thinking about what that client relays back to the person who referred them, whether it be an attorney, accountant, broker, or family member. The value of a well-conducted, thorough appraisal, surpasses its initial cost. It also promotes trust and confidence in the quality of work and the opinion of value. Invest in quality appraisal work to prevent financial burdens stemming from poorly conducted appraisals and inaccurately valued properties. Make the choice that guarantees your peace of mind.

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