The grocery store down the street from my house sells a gallon of milk for $2.50. A small cup of coffee at Dunkin Donuts runs $1.60. The going rate for a Hunter 5-minute ceiling fan at Home Depot is $99. A 55” Vizio HDTV with internet apps sells for $1,399 at Costco (I know because I just bought one and it is awesome). Want more articles like this? Create an account today to get BiggerPocket's best blog articles delivered to your inbox Sign up for free So how does my grocery store, Dunkin Donuts, Home Depot and Costco know what these products are worth? The answer is very simple. The market tells them so. No one would pay $7.00 for a gallon of milk, or $900 for a ceiling fan. It’s a universally accepted economic truth that value is determined by the market place. A product or service is worth what someone is willing to pay for it. That is, unless it’s residential real estate. If you’ve bought or sold a home in the past 24 months then you know exactly what I’m talking about. Very little, if any, consideration is given to what the market is willing to pay for your property. Chances are, the residential real estate appraiser randomly selected to determine the value of your home isn't too interested in what the offer price is â or the fact that there were multiple offers. The buyer's mortgage underwriter, who is charged with reviewing the appraisal, certainly doesn't give a damn. The mortgage underwriter's job is to protect their own backside from originating a bad loan. The single most important criteria, and in many cases the ONLY criteria, an appraiser and mortgage underwriter use to determine residential property value is historical data. Which begs the question – if the single most important criteria, and in many cases, the ONLY criteria an appraiser and mortgage under use to determine residential property value is historical data THEN HOW ON EARTH DO PROPERTY VALUES EVER GO UP? Well, they don’t, at least not the in the Phoenix metro housing market. On Monday, November 14th there were just over 14,000 active single family homes for sale on the Arizona Regional Multiple Listing Service. That’s about a 2.2 month supply. To offer you some perspective, when things were at their worst here in 2007 there were more than 50,000 active listings and a 12 month supply. If supply is low and demand is high we all know what is supposed to happen next. Prices go up. But that’s not happening here. According to Mike Orr, a Phoenix housing analyst with Cromford Report, home values have been hovering around $82 per square foot for the past 12 months. There is no shortage of buyers or available credit. The numbers tell us that. It is clear that the reason home prices are not going up is because of low appraisals. For what it’s worth, I don’t blame appraisers. In most cases their hands are tied. If the mortgage underwriter doesn’t like an appraiser’s valuation they’ll just require another appraisal be done. The appraisal process is subjective, unfair and extremely flawed. But until something changes we investors must deal with it. Before I buy a house to flip I find comparables in the area that can be used to support my retail sales price. After the house is under contract with a retail buyer I make sure the appraiser must contact my listing agent for access to the home. That way my Realtor can let the appraiser know what improvements were done. Most of the time, the appraiser will want to see a list. Even better. When my Realtor emails the appraiser a list of the improvements he'll also include some comps. Using this approach I've gotten my houses to appraise at contract price about 95% of the time. It’s not perfect, but neither is the appraisal process.