The Appraisal Process

Appraising the Appraiser: A Guide to Real Estate Home Valuations

Selling your home inevitably involves a visit from an appraiser. Even a buyer who loves the place and meets your asking price will still have a mortgage lender to satisfy. The lender will require that an objective third-party inspects the house to determine its value. That is where the appraiser comes in. An independent professional, the appraiser bases his or her opinion solely on market conditions and the state of your property.

Homeowners often ask me: “How does the appraiser determine the value of my home?”

Appraisals can generate considerable anxiety for the seller. People naturally worry that the appraiser will find some reason to value a home below what the buyer has offered to pay. Rest assured, though, it is very rare for appraisers to value a property below the offer price.

Nevertheless, there are certain things every seller should know about the appraisal process. There are also a few steps every homeowner can take to maximize their chances for a strong valuation. While none of them are guaranteed to sway the appraiser’s final verdict, good preparation can definitely pay off. To begin with, every seller should understand the considerations involved in an accurate real estate appraisal.

Structural Soundness

Appraisers often know quite a bit about home construction and maintenance. The most basic components of a house are the foundation, walls, and roof. These three features significantly influence the overall functionality and reliability of a home, and appraisers scrutinize them. Construction defects or other damage to a roof or foundation can quickly make a home uninhabitable. Remember that the appraiser’s primary function is protecting the mortgage holder from lending money on a property that lacks sufficient equity. Anything affecting a home’s structural integrity receives the closest possible scrutiny.

Property Size

Lot and home size are both significant appraisal considerations. Generally speaking, bigger is better. The larger the house and grounds, the higher the valuation will be. Similarly, the higher the number of bedrooms and bathrooms, particularly if they are roomy and accommodating, the greater the market value. Home buyers also appreciate properties that offer the potential for expansion and look for properties that are amenable to that. Ultimately, the square footage of the home plays a large role in the overall appraisal price.

Interior Conditions

While a sound roof, siding, and foundation are all critical, a home’s interior features are just as important to an appraiser as its exterior. Windows and doors, flooring, plumbing, electrical wiring, and kitchen and bathroom features receive extra close attention. Good appraisers are knowledgeable in all of these areas. They are able to tell the good from the bad, and their reports will reflect that determination. An internal examination will go so far as to include your appliances and even the light fixtures! 

Home Improvements

Many homeowners have added value to their properties since the original construction by implementing a range of renovations and improvements. Appraisers are very interested in the nature and quality of these additions. New floors and appliances, refurbished bathrooms and kitchens, or an HVAC system can all increase the overall appraisal price.  A renovation combined with a new dishwasher can add 20 years to the life of a kitchen! Buyers—and their lenders—love new appliances and quality improvements because they add lasting value to a home.

Extras and Additions

The little extras that make your home unique can also lift the appraisal price. A home might be very basic, or it might have a number of special features. Air conditioning, for example, might be unusual in areas with cooler climates but, nonetheless, a terrific bonus for the homeowner during the summer months. An appraiser visiting on a hot day might be especially appreciative! Swimming pools, particularly ones in good condition, also add to the value of a property in areas where people are willing to pay for them. Even seemingly basic items, like insulated windows, fireplaces, garages and security systems, can all add up in an appraiser’s eyes.

How Do Real Estate Appraisers Determine Market Value?

Now that you know what home features an appraiser considers, you might wonder how he or she uses that information to calculate a specific market value. The answer for most residential properties is the comparable sales price approach. An appraiser starts with recent sale prices for similar homes within a certain distance. Ideally, only sales that have been transacted within the past three months will be used. The more recent the transaction, the more relevant the price is to the current market conditions. Sales more than six months old are viewed as too remote in time, and generally not considered. “Similar homes” are those closest to your type of house. A ranch house, for example, will be compared to similar ranches, not to colonials.

The appraiser then adjusts the valuation according to the features that are specific to your home. Assume, for instance, your home has three bedrooms and one bath. A nearby home has a similar square footage, but four bedrooms and two bathrooms. The appraiser could use the other home as a “comp,” but would then adjust for the additional bedroom and bath. Adjustments also take into account any other features that make your home stand out from similar properties in the area.  A property’s location, age, condition, and amenities all go into formulating an ultimate market value.

 

How to Challenge a Low Appraisal

Appraisers occasionally do put forward an appraisal price that is below what the buyer has offered to pay. If this happens to you, there are some important steps you must take before proceeding to closing. First, get a copy of the appraisal report and go over it with a fine-tooth comb. Homes have been known to come in lower than they should due to a clerical error in the report that influences the final value. It could be something as basic as the square footage being off. It’s worth taking the time to check!

If there are no mistakes in the report, the next item to examine is the list of comparable properties. Are they truly comparable? Has the appraiser used homes in a less desirable location? Sometimes the comparable homes are off because the appraiser does not know the area as well as he or she should. This exact scenario arose while I was selling a home in Chicago, IL. In that case, I had to challenge a low appraisal but knew there was a pretty good chance it would get adjusted. The reason was the report not only undervalued the home’s location but contained a factual error as well!

If the comparable properties check out, the next step is asking the buyer to seek a second appraisal. Because this carries a cost, be prepared to put up the money yourself. Also, keep in mind the fact that the buyer may become uncooperative after an appraisal comes in low. Nobody wants to overpay for a property, and the buyer will view the appraiser as an expert who is not to be trusted. As with any profession, though, there are good and bad appraisers, and certainly none of them are perfect. Paying for a second opinion can be worth it. However, if the buyer simply will not agree to another appraiser, reducing the sale price to match the appraisal is the last resort to preserve the deal.

How to Avoid a Low Appraisal

As we have just seen, dealing with a low appraisal can be a real challenge for the seller. Is there anything you can do to avoid this possibility? Absolutely! There are a few simple steps any seller can take to present a house in the best possible light. An appraiser may ultimately prove immune to an owner’s sales pitch or need to sell at a higher price, but careful preparation can definitely improve the odds of success.

Make a List of Improvements and Extras

Even the most experienced, sharp-eyed appraiser can fail to note an extra or addition. By making a list of all the things you have done to improve the house, you and your real estate agent will ensure nothing is missed. One of the most important jobs for a realtor is making the appraiser’s task easier. In creating the list, it is especially important to include major structural or mechanical renovations like a new kitchen or bathroom. An upgraded heating system, a new roof or replaced siding are also worth noting. The goal is to list all the features that might lift your home’s value. Help the appraiser help you!

The Appraiser is Your Audience

The old saying ‘you never get a second chance to make a first impression’ definitely applies in real estate. While appraisers must base their estimates on ‘hard facts,’ like square footage and number of bedrooms, appraising is not an exact science. Even the most objective, ‘bean-counting’ appraiser is ultimately making judgment calls based on the ‘feel’ of a house. When people enter a property, they either get a good feeling, or they do not, and appraisers are human too. There is definitely a psychological component to home evaluation. To boost the appraiser’s feel-good factor, carefully consider everything he or she will see on the visit.

Clean the House and Yard

Years ago, when I first started out selling real estate, I forgot to remind the seller about how important it was to maintain an immaculate home. When I accompanied an appraiser to the property, I was dismayed to find dirty dishes in the kitchedn, food left out, clothing strewn around the floor, and the beds a mess. I have never since forgotten to tell my clients about the importance of cleanliness when selling their residence. Make sure your house is uncluttered and clean when the appraiser visits. By the same token, don’t let your yard look like an episode of Sanford and Son! It does not require a landscaping professional to cut the grass, trim the hedges, and throw a layer of mulch in the flowerbeds. A little effort in the yard can pay great dividends.

Repair What You Can

You never know what small issue might stick in an appraiser’s mind, so take the time to address any obvious defects. Fix that leaky toilet and replace the missing fence board. Thirty minutes of repair work might make a difference when the appraiser sits down to calculate a final value. Again, you are trying to create a positive ‘feel’ in the appraiser’s mind, and the last thing you want him or her thinking about are little flaws that could easily have been repaired.

Be Helpful

Most appraisers love having their job made easier, so help them out! Answer questions honestly and make sure he or she has access to all areas of the home. You will also want your realtor to attend the appraisal. More often than not, the appraiser will have questions or concerns. A good real estate agent will be there to represent your best interests!

Another way a realtor can help during the appraisal is by bringing listing sheets for comparable properties. Realtors should never assume that the appraiser knows ‘comps’ better than they do. This is definitely an area where your real estate agent can add value. An appraiser may not have seen the comparable homes, but the realtor will have!

The bottom line: An appraisal is a big hurdle you need to clear during the process of selling your home. Knowing what appraisers look for goes a long way toward ensuring there are no issues with your home being properly valued.

Real Estate Appraisal Myths

Sometimes in real estate, people say a certain thing so often it becomes a proven fact in their minds. This happens not only to homeowners but even to real estate agents themselves. Two current myths particularly fit this pattern. The first myth is that a home’s assessed value for tax purposes is something appraisers consider. They do not! The assessed value is completely unrelated to the market value, and all appraisers know this. Unfortunately, realtors sometimes perpetuate this myth through marketing. “Don’t miss this amazing offer! Priced $100,000 below municipal assessment!” The agent would like you to prescribe to the assumption that there is no difference between the market and assessed value. Do not fall for it. There is a fundamental difference between the assessed and market values.

A second myth making the rounds is that appraisers use Zillow values to draw their conclusions. Again, they do not. Do you seriously think a professional appraiser relies on what a computer says your home is worth? Unfortunately, some folks continue to believe this.  Appraisers understand that Zillow real estate values are not accurate. Its estimates in some markets are so far off one wonders why the site even uses them. Zillow is an otherwise excellent site for real estate data, but remember to take their home valuations with a giant grain of salt.

As a homeowner, you should keep these things in mind when navigating the process of home appraisals. I hope you have found this information useful, regardless of whether you are selling your home now or plan to do so in the near future!