Individual buyer and sellers make individual decisions, and those decisions aren’t always equally well informed or rational. Sometimes people get a good deal, sometimes they enter into a bad deal. Sometimes the true nature of the transaction isn’t being disclosed.
What we do is to seek out the predominant trend and rank the subject in that trend. In the case of a mortgage transaction, the value of the property acts as collateral for the loan, so a lender (theoretically) wants to avoid overencumbering a property by inadvertently loaning more than it’s worth. Hence their use of an appraisal to make that decision.
In truth a lender isn’t supposed to care what any individual buyer thinks a property is worth because individual buyers are not assumed to be adequately informed/motivated. However, we do assume that buyers as a group are adequately informed, which is why we seek evidence from multiple transactions that would demonstrate that dominant trend.
How a faulty appraisal enables a bad deal is usually the result of one or more lies told by an appraiser in the appraisal report. About 95% of “bad appraisals” can be objectively demonstrated to be bad by disproving factual errors or mistatements about the attributes of either the subject property, the properties used as comparables, or whether those properties really do rank among the “most recent, similar and proximate sales” as is certified in the appraisal report. It’s rare for an appraiser to use incorrect methodology in the analysis, and it would be just about impossible for an appraiser’s opinion to be unreasonable if they’re otherwise being honest about the facts in their assignment.
Columnists like Robert Bruss like to tell their readers that appraisers sometimes “miss” relevant sales data as a result of laziness or stupidity. He’s a very biased and poorly informed guy to be giving advice about appraisals.
The truth is that (around here, anyways) it takes a lot less time and effort to find the most similar sales and conclude to the reasonable value than it does to find sales that can be misrepresented and distorted into looking like the most similar sales for the purposes of getting the higher value. Easier to tell the truth than to tell the lie and get away with it.
