Monday, May 24, 2010

Real Estate Appraised Valuations vs. Fair Market Value

I’m a subscriber to, which, according to its website, is a home valuation site that provides an estimate of a home’s market value. According to Zillow, the “Zestimate” of my home increased 1.1% in January while according to the Zestimate I received last week, the value decreased by 0.5%. Since I have no present intention of selling my home, I find these fluctuations to be more interesting for their entertainment value than anything else.

According to, it differentiates its Zestimates from appraisals because Zestimates are computed using a proprietary formula. Real estate appraisals on the other hand are performed by qualified professionals, often – although not always – by an appraiser who is a Member of the Appraisal Institute (“MAI”), which means the appraiser has fulfilled specific educational and experience requirements and passed an examination. (See,

Are real estate appraised valuations the equivalent of the fair market value (“FMV”) of real estate?

Maybe, but not necessarily.

In one variation or another, FMV is defined as the price at which a bona fide knowledgeable, willing seller under no pressure to sell will sell a real estate asset and the price a bona fide knowledgeable, willing buyer under no pressure to buy will pay for that asset.

The appraised value of real estate is basically the opinion of the appraiser and can take one of several forms, including:
  • The “cost value” approach, which is the aggregate of the land value and the depreciated value of any existing improvements.
  • The “sales comparison” approach, which is predicated on the recent sales value of similarly situated comparable properties.
  • If the property is commercial, retail or industrial, the “income capitalization” approach may be the basis for an appraisal, which capitalizes the income stream to be generated by a particular property and bases the value of the property on the “cap rate.”

    So, for example, a cost value may, at any particular point in time, be significantly higher than a prudent buyer would pay for a property. Similarly, the cost value may be significantly lower than the price a prudent buyer would pay, thus leading to an enviable “bidding war” among competing buyers, one of whom will end up paying more than the asking price for the property.

    So, why is my Zestimate up one quarter and down the next? Apparently, because of fluctuations in the recent sales prices of “comparable” homes in my neighborhood. Of course, I think my home is incomparable – but that would lead me into a discussion of “intrinsic” value, which is a different proverbial kettle of fish.

    As a pretty clear demonstration that value is in the eye of the beholder, a recent value for my home was 15% greater than the MAI appraised value conducted in connection with a mortgage refinance at the same time. Apparently, the value of my home is worth 15% less for loan security purposes than it is for sales purposes. Presumably, the MAI appraiser conducting the appraisal for my prospective lender knew the purpose of the appraisal and chose to be conservative. Thus the often-heard sobriquet, “Made As Instructed”!
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