The Principle of Exception: Commentary on the
Relocation Appraisal Assignment
MOBILITY Magazine, November 2003
Sometimes, with real estate transactions, things just happen.
Fryer writes that if there ever were to be a new principle coined
in relocation appraising, it would be the principle of exception.
By Thomas G. Fryer, CRP, SRA
After a high level of involvement in the appraisal assignment, you became dismayed when you found out that your estimation of the anticipated sales price was off by more than 5 percent from what the home actually sold for. You say to yourself, "I did my homework, I had good market data, and I demonstrated the skills, knowledge, and competencies of an experienced relocation appraiser. Why wasn't the expected result within 3 percent of the selling
price?"
Sometimes there are no keys to understanding the why, how, and when certain things happen. It goes beyond the academic theories of the familiar appraisal principles. It goes outside the limits of common sense. It is not within the boundaries of logic. There may be extenuating circumstances that prevented you from achieving your objective. It is unforeseen, unpreventable, or unpredictable. If there were ever to be a new principle coined in relocation appraising, it would be the principle of exception.
The principle of exception states that the outcome of a relocation appraisal can be compromised greatly by the significant exceptions to the expected results. The significant exceptions can emerge when least expected and they can be camouflaged by buyer/seller motivations; masked in corporate policies; cloaked in management decisions; or shrouded by unrealistic advice of real estate sales agents. To many appraisers the exceptions to the expected results are very real, but to numerous appraisers they are imaginary. They are real for many because they understand that the exceptions to the expected results are the realities of the real estate marketplace; however, imaginary to some because they do not ever look back to grasp why they were off on the assignment. Most importantly, what are some of these significant exceptions to the expected results?
The significant exceptions that are outside the relocation appraisers' control and have a direct effect on your appraisal performance can be classified under a number of primary headings: buyer/seller motivations, management decisions, corporate policies and market incentives, economic, environmental, legal, financial, and physical. There can be numerous examples under each heading. Every relocation appraiser has their "tales of woe" and can cite some examples. Let us look at a few exceptional
examples.
Buyer/seller motivations. The relocation appraiser attempts to estimate the anticipated sales price with the typical buyer in mind. However, as we all know, buyers do not always act in a typical manner. The price paid for a home depends fundamentally on the buyer's level of involvement in the buying decision. When buyers are highly involved in the buying decision, they actively search and analyze their housing sub-market. If they do not have the time, they seek the counsel of a professional relocation
specialist—a competent appraiser, or a knowledgeable, straightforward real estate agent. They become
informed—they buy smart.
The reality is that most buyers do not have the time to do all the things they are supposed to do in order to make that informed buying decision. They are not fully informed, and as a result, may not buy
smart!
How many times have we seen a buyer relocate from a higher priced housing market and not flinch on paying full list price? How many times have we seen the buyer, with only a three-day househunting trip, make an unwise buying decision; and how many times have we seen overbuying because of loss-on-sale assistance? These hurried and ill-advised decisions often result in exceptions to the expected results as indicated in this article.
Finding the Exception
You were amazed when you found out you were off on the highway property assignment after properly addressing the adverse influence. You interviewed the new buyer and found out that she purchased the property at full list price because the highway was the first road to be plowed after a winter snowstorm. The highway (not the home) created value and that was instrumental in her buying decision. Location, location,
location.
The house near the fish processing plant sold 10 percent higher than you estimated. You found out from the selling agent that the relocating gentleman purchasing the home thought it smelled just like the "breeze from the bayou" in his home state. The smells from the fish canning plant were not a concern for the southern gentleman. The only thing that smelled was your report card on the
assignment.
Market information clearly indicated that you discount the dated 1939 property but it sold at full list price (after 130 days on the market) because the lady said, "it brought back fond childhood memories of the house I grew up in Kalamazoo. I like it just the way it is." Kind of shoots your methodical, precise, market-derived analysis in the foot, doesn't
it?
The above are just a few examples of exceptions to the rule but there are many more. The real estate community probably could cite numerous examples. While you as an appraiser, and perhaps 98 percent of the buying population, would discount the highway property for its adverse influences, the house near the fish processing plant for the foul odors, and the 1939 home for its lack of updating, there may be those 2 percent to prove you wrong. There is undoubtedly an intrinsic, intangible, and esoteric value that cannot be measured by the
appraiser.
Management decisions. Management is confronted with a host of disposition decisions that may have an impact on the anticipated sales price. Management usually does a good job of balancing employee morale with a solid marketing strategy to minimize home carrying costs. However, sometimes when profits are squeezed, the proper decisions may not be made to minimize marketing time. Holding costs actually escalate. Sometimes employee morale decisions may trump sound management disposition decisions. Now and then those cost-effective recommendations are
ignored.
From time-to-time the network of competent brokers breaks down and so does the marketing strategy. How many times have you seen the lack of broker interest and the snow piled up in front of the home, or the grass not cut? How many times have you seen fix-up costs initiated on the "shop worn" home at the end of 120 days rather than at the
beginning?
Corporate incentives. There may be circumstances beyond your control when transferees are enticed to artificially price or sell their home based on corporate bonus programs; or purchase with loss-on-sale assistance.
Corporate bonuses have been as high as 6 percent, but typically are in the 3 percent to 4 percent range in many markets. The transferees generally have 30 to 60 days to accept an offer to receive the bonus. When a transferee has that incentive in their back pocket, and they are listed with "their choice" of a
REALTOR® who will lose their home to the networked broker after that 30- or 60-day period, often they receive their buy-out offer, then place the home at a price point often right at, or below the appraised value. The appraised value may have been based on a client-requested 180 days. What a deal,
huh?
Some corporations, to cut down on carrying costs, allow transferees to accept an offer for less than the appraised value of the home and pay the transferee for the loss on sale based on original purchase price. Just smoked you out of the
water!
Economic. There are certainly micro and macro market forces beyond our control. Global and national business fluctuations can affect both state and local conditions. The major employer announced downsizing with a 10 percent employee reduction, a freeze on hiring, and a 25 percent reduction in expenditures. The major employer merged with another company and they are moving all operations to the east coast. There are numerous examples but the point to make is that sudden declines (or upswings) in market conditions are
unpredictable.
Environmental. Following are a few examples of unforeseen events that actually happened subsequent to the appraisal.
A class-action lawsuit was filed against a company for allegedly contaminating the river. You did a recent transfer appraisal on a house on the river in the area to be
tested.
A train derailed spilling toxic waste just outside the subdivision and house you recently did a transfer appraiser
on.
The Department of Environmental Quality announced that there is an illegal landfill just down the road from the home you did an appraisal on. All the well water in the area may be
contaminated.
Legal/government. Again, here are a few realities of the market. The vacant parcel behind the house you did an appraisal on was granted a special use permit by the township planning department for an adult foster care home; the county's Board of Commission voted to approve building a new county jail on the vacant site abutting the residential neighborhood you did an appraisal
on.
Financial. As a result of a sudden upward swing in the interest rates an article in
Inman News read, "Bang, the refi boom is dead." Last week when you did the transfer appraisal it was a sellers' market. The spike in interest rates probably signals a turning point in the market and a forecasted buyers'
market.
Physical. We are all familiar with "Acts of God and other disasters" that may occur after the effective date of the appraisal. Some of these include storm damage, floods, earthquakes, tornados, and other natural events, not to mention vandalism, or unusual "transferee wear and tear" after the effective date of the appraisal before moving
out.
No Exception to Accuracy
We appear to be judged for our accuracy, in spite of the principle of exception, are we not? ERC's
Guide for Managing the Mobile Workforce touches on the subject in chapter two with the following comments, "More than any other player, the appraiser feels the heat of the spotlight whenever appraisal accuracy is discussed. Having been hired to make a professional judgment, no amount of explanation can ameliorate perceived inaccuracy. Yet, few factors affecting the price outcome are either known by the appraisers or subject to their control. For example, the appraiser has neither met nor interviewed the best-qualified buyer; the broker is in significant greater control of the terms of the sale; and the seller may capitulate too early in the negotiating process. Nevertheless, when the post-mortem is held, the appraiser is held accountable."
As a result of the many imperfections swirling around in the real estate sub-markets, the many influences that affect value, shifting buyer habits, and the unpredictable motivations of the buyer and seller, relocation appraising never will be an exact science. The appraiser's success as a relocation appraiser depends fundamentally on his or her level of involvement in the appraisal process; but sometimes, no matter how thorough you are, no matter how experienced you are, your successes often will be overshadowed by exceptions to the expected
results—or the principle of exception.
The next time one of those conscientiously and meticulously documented appraisals comes back more than 5 percent, call your relocation coordinator and invoke the principle of exception. Do you think they would have sympathy? Would they think you are a victim of the principle of exception? Rather than being a casualty of the assignment, maybe it would not hurt to try.
While relocation companies are looking for bottom-line results, it would be unfair to say that they do not care why a property sold for a great deal more or less than anticipated. If some event occurred subsequent to the appraisal, which was unforeseeable, they should be made aware of it. They may remove that property from your statistics and they also may be able to get their client to remove it from their performance review statistics. Regardless of the outcome, it is necessary to recognize the intricacies of the industry, then move forward, never compromising your high level of involvement in the relocation appraisal
process.
Thomas G. Fryer, CRP, SRA, is president of Fryer Appraisal Service, Midland, MI. He can be reached at e-mail
t.fryer@chartermi.net.
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