One of the most frustrating aspects of real estate transactions—whether you’re an investor, a homeowner, or an agent—is when two appraisals of the same property come back with different values. When you’re dealing with financing, these discrepancies make or break deals. So why do appraisals differ, and how can you rectify the differences? Below are several variables (some subjective) that influence final opinions of value.
Estimated Value vs. Market Value
An appraisal isn’t always an exact reflection of market value. Several factors influence the final number, and timing plays a significant role.
- The Shelf Life of an Appraisal: Market conditions change rapidly, and an appraisal from even six months ago might already be outdated. A sudden economic shift, a natural disaster, or a local market trend could make a previous valuation obsolete.
- Effective Date vs. Inspection Date: The critical date in an appraisal isn’t always when the property was inspected. For estate appraisals, for example, the valuation date is typically the owner’s date of death—which could be months or even years before the appraisal is conducted.
Intended Use and Definition of Value
Not all appraisals are conducted for the same reason. Lenders, insurers, and tax authorities may have different purposes for appraisals, affecting the methodology.
- Insurance appraisals focus on the replacement cost of improvements rather than market value.
- Investor-focused appraisals might include income-based valuation methods in addition to comparable sales.
Highest and Best
A property’s value isn’t just determined by what’s there now—it also depends on its potential. Appraisers consider highest and best use, which means they assess whether the property could be used in a more financially productive way.
For example, imagine a small mobile home park. If the land is worth more when subdivided into three separate lots, the highest and best use might be redevelopment. However, if the current mobile home rentals generate stronger cash flow than lot sales, that could justify keeping it as is.
Comparable Sales
One of the most common reasons for appraisal differences is the selection of comparable sales (or “comps”). The appraiser must determine which past transactions are most similar to the subject property.
- Were any potentially strong comps overlooked?
- Did the appraiser rely on sales that were unreliable due to special circumstances, such as distressed sales or non-arm’s-length transactions?
- Were adjustments applied consistently across the selected comps?
For example, let’s say one appraiser adjusts a comparable sale down by $4,000 because it has two-and-a-half bathrooms, while the subject property has only two. A second appraiser might apply a different adjustment—or even ignore the difference entirely.
Gross and Net Adjustments
Once comps are selected, appraisers make adjustments to account for differences. These adjustments are typically expressed in dollar amounts and percentages.
- Gross adjustments represent the total dollar amount of all changes made to a comp, whether positive or negative.
- Net adjustments reflect the final difference after all additions and subtractions are factored in.
A high gross adjustment suggests that the comp property was significantly different from the subject property—potentially making it a weaker comp. Lower adjustments typically indicate a more reliable comparable sale.
For example:
- If a comp sells for $100,000 and has a $5,000 reduction for an outdated kitchen and a $2,000 increase for a larger lot, the gross adjustment is 7%, and the net adjustment is 3%.
- If another comp has adjustments exceeding 15% of its sale price, it might not be the best comparison.
Double Adjustments and Inconsistencies
Errors or inconsistencies in the adjustment process can also lead to appraisal differences. A review appraiser will often check whether adjustments are applied consistently across comps.
For example, if an appraiser deducts $6,000 per acre for additional land in one comparable but only $2,000 per acre in another, a review might flag the inconsistency.
Another common issue is the double dip—when an appraiser makes two separate negative adjustments for the same characteristic. If a property has two bedrooms instead of three, the appraiser might lower its value once for the missing bedroom and again for “functional flaws,” effectively counting the same issue twice.
What Can You Do About Conflicting Appraisals?
If you’re dealing with two conflicting valuations, you have options:
- Request a Reconsideration of Value (ROV): Lenders can formally request a second look if there are errors or unreliable comps.
- Hire a Review Appraiser: A second opinion can help clarify discrepancies, especially in high-stakes deals.
- Provide Additional Data: If an appraiser missed key sales or overlooked market trends, submitting additional information can strengthen your case.
Knowing how valuations work and how to address possible discrepancies with appraisers keeps you in control of your transactions.