I co-own a home with my two sisters. One sister wants to buy us out. The value estimates are all over the board and I am confused. Can you help? Florence T.

January 10, 2016

Determining a property’s value is difficult even for people trained to do the work. Here is how to go about it.

 

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Reader Question: I currently co-own a house with my two sisters. It was in our mother’s estate. One of the sisters wants to buy the two of us out which is fine with us, but we want to make sure the price she is offering is fair to us all. We had an appraisal done using the comparison of appraisal approach and the cost appraisal approach. The comparison is about $80,000 lower than the cost approach.

I also looked online at a website that offers value estimates, and they have it at more than $180,000 higher than the appraiser’s cost approach. Another online estimate is a little lower than the cost appraisal. The home is forty years old and has 3500 ft², four bedrooms and 3.5 bathrooms with an attached two car garage and two kitchens. I am confused. Can you advise me what we can do next? Thank you, Florence T.

Monty’s Answer: Here is an approach to complete the transaction. First off, the estimates one can get online are of little value. While they may be in the range of value, the reviews users post on this type of website often point to many highly inaccurate estimates. An online appraisal is ill-advised primarily because a trained person is not setting foot in the house, the extreme differences in the appraisal information can be befuddling.

Seven tips to consider

  1. Come to understand there is no fixed price any home is “worth.” The fact is every home has a “range of value” that becomes wider as good comparable sales and competing properties become scarce. An article titled “Determine a home’s value” at https://dearmonty.com/determining-a-homes-value/ will be helpful in better understanding a home’s value range.
  2. Next, understand that selling the property together is the only way each sibling share is identical. Otherwise, at some future date the remaining sibling who “stays in” now will either come out on the short end or come out bettering the early exit siblings. No one can predict the future.
  3. Order a second appraisal, knowing that it is just another considered opinion. Then average the two assuming none of you challenge either document, and the final number in each appraisal are within ten percent.
  4. If the two are further than ten percent apart, a third appraisal will be helpful. Agree in advance how to factor it into the mix. The reason to agree on the factoring method early is because it affects the buyout price. Here are the options to utilize:
    a. The two lowest
    b. The two highest
    c. The two closest
    d. All three and average them
  5. The process described in item number three and four above is the method most commonly utilized by companies relocating an employee. While there are many possibilities, this methodology is the most prevalent in corporate relocation as a fair method to determine value when the marketplace itself is not the final word.
  6. Choosing an appraiser requires a bit of research. How did you choose the first appraiser? For appraisal number two, seek advice from people you know who may use appraisers regularly in their work. Attorneys, lenders, and accountants are examples of consumers of appraisal services. Or, consider asking a few questions of your candidates, as appraisers are not all created equal:
    >How many home appraisals have you completed in the past 24 months?
    >Where do you live?
    >How many appraisals have you done in this neighborhood in the past ninety days?
    >Do most of your appraisals occur in a particular price range?
    >Do you do appraisal work full time or do you have other employment?You want an appraiser that lives and works near the property and knows the neighborhood.
  7. Care should be taken to avoid appraisers with whom one of you may have a personal relationship. An arms-length process reduces future suspicion about one of you influencing the chosen appraiser if there is disagreement over the outcome. An article about new rules in the law for appraisals you may find helpful is at https://dearmonty.com/appraisers-evaluate-appraisal-management-companies/

All appraisers consider the cost, income, and the market data approach, among other considerations, in arriving at a single price opinion of value. While it is good to understand all of their calculations, the final value estimate is most important. The “range of value” in each appraisal document is determined with the sale price of the comparables the appraiser chose.