The Real Story
News and commentary about the real estate market and related topics
Dave Parrish, ABR, CRSA, CSP, GRI, ePRO, Realtor
So How Much Is That House Worth?
While every home owner has an opinion of what their home is worth, that doesn’t impact the lender’s decision of a property’s value in the market. For that estimate of value lenders turn to the services of licensed Real Estate Appraisers. The overwhelming majority of homes sold in the U.S. require the participation of a lender to finance the home. Unless the prospective purchaser has a willing and able rich aunt, their agreement to the seller’s selling price is not the final word on value.
Appraisers use comparisons of recently sold properties to value a subject property. Several comparable properties in the same area are chosen that sold in a reasonably recent period. By comparing features of the properties, an estimate is arrived at for the subject property. Don’t confuse a Comparative Market Analysis, or CMA, with an appraisal. Real estate agents use CMAs to help home sellers determine a realistic asking price. Experienced agents often come very close to an appraisal price with their CMAs, but an appraiser’s report is much more detailed … and is the only valuation report a bank will consider when deciding whether or not to lend the money.
A real estate appraisal helps to establish a property’s market value–the likely sales price it would bring if offered in an open and competitive real estate market. Your lender will require an appraisal when you ask to use a home or other real estate as security for a loan, because it wants to make sure that the property will sell for at least the amount of money it is lending.
- Appraisers are licensed by individual states after completing coursework and an intensive internship that familiarize them with their real estate markets.
- The lender might use an appraiser on its staff, or contract with an independent appraiser.
- The appraiser should be an objective third party, someone who has no financial or other connection to any person involved in the transaction
- You will probably pay for the appraisal when you apply for your loan.
Appraisals are very detailed reports, but here are a few things they include:
- Details about the subject property (the property being appraised), along with side-by-side comparisons of three similar properties.
- An evaluation of the overall real estate market in the area.
- Statements about issues the appraiser feels are harmful to the property’s value, such as poor access to the property.
- Notations about seriously flawed characteristics, such as a crumbling foundation.
- An estimate of the average sales time for the property.
- What type of area the home is in (a development, stand alone acreage, etc.).
There are two common appraisal methods used for residential properties: the Sales Comparison Method and the Cost Method. By far the most commonly accepted approach is the Sales Comparison Method where the appraiser estimates a subject property’s market value by comparing it to similar properties that have sold in the area. This method is preferred by lending institutions as it provides them with a valuation based on market experience and thus a better idea of value should they have to take a property over as the result of foreclosure.
Since no two properties are identical, the appraiser must compare the comps (the comparable properties) to the subject property, making adjustments to the comps in order to make their features more in-line with the subject property’s. This is accomplished through an extrapolation process. The result is a figure that shows what each comp would have sold for if it had the same components as the subject. By far the most important feature in real estate is location, therefore comps are generally selected first based on their proximity to the subject property. Following that criteria, the appraiser will look for the most recent sales of comparable properties. Generally, the appraiser will only consider sales within the last six months, so as to have the most accurate read on the market.
The second most common method of establishing value is the Cost Method. This approach is most useful for new properties, where the costs to build are known. With this method the appraiser estimates how much it would cost to replace the structure if it were destroyed. This method is considered a higher risk valuation technique by lenders as it offers no market history.
Next week, I’ll review the latest news (changes) in the world of appraisals, why they have come about and their impact on you … whether you’re a buyer, a seller or borrower (i.e. refinance candidate)!
