In the game of real estate, most people believe that there are only two main players – the buyer and the seller with their coaches being their Realtors. In reality, there is another major player – the lender. They are such a significant player in this game (unless the transaction is handled 100% in cash) that if you don’t play by their rules, they are going to, “take their ball and go home,” and no one can play at all. The appraiser is the eyes of the lender in the field. If you are the potential buyer or seller, you need to be aware of the role of the appraiser in the transaction.
The 2021 real estate market resembles an auction, with buyers placing extremely competitive offers in the hopes of being the top bidder. We are seeing deals in many markets around the country that are completely detached from a fair value. On that note, we must remember that the appraiser's job is to represent the market, which isn't always the highest bidder. Don't get me wrong, there are several aspects of the appraisal profession that need to be improved, but it is not the appraiser's responsibility to correct an irrational market dynamic. An appraisal is literally an opinion of value on the day the appraisal is performed.
What Does an Appraiser do During an Appraisal?
When the appraiser is contracted to give their opinion of value for a home, they will receive a copy of the purchase contract so they can see exactly what the buyer and seller have agreed upon as the purchase price. This assists them to know what the market is setting for value; however, this does not guarantee that this value will be within reason for what has been occurring in the market over the past few months.
There are 5 main areas that appraisers focus on while at the home:
The exterior of the home. The soundness of the structure and the quality of the construction so that the property cannot harm the new buyers of the home. The key areas will be foundation, roof and overall structural functionality.
The size of the home. The appraiser will measure the square footage and diagram the home along with taking photos so they can accurately compare the property to those they have chosen as comparables.
The interior condition of the home. This includes windows, doors, floors, walls, plumbing, electrical, kitchen, and bathrooms. They want to make sure these are in good condition and operable. Again, appraisers are not home inspectors, but they need to make sure the home is functional.
Improvements to the home. This would include remodels to the kitchen, bathrooms, a newly finished basement, or other material changes that have increased square footage or the quality of the home. Keep in mind, just because you spent $25,000 on your improvements does not mean that the market value of your home has increased the same amount. In some cases, you may have made improvements that added appeal, but not true value to the property.
Amenities and location of the home. Amazing views, a pool, built in barbecue grills, home theatres, or other features that make the home stand out in relation to the other homes in the neighborhood. Additionally, and perhaps one of the most crucial components to the value of the home - whether on paper or just for the appeal of the home is the home’s location. Factors such as accessibility to major routes, shopping, restaurants, the local crime rate, the school district rating, proximity to hospitals, police, and fire stations can all go into the appraised and intrinsic value of the home.
Just Give Me the Numbers!
Once the appraiser has compiled all the data, they can formulate an opinion of value of the home. In most cases, the appraiser will use the Sales Comparison Approach method where they will look at sales of properties that are similar in style, age, size, acreage, total bedrooms, total bathrooms, upgrades, etc. Ideally, they will find at least 3 properties that have sold within the past 90 days (the more recent, the better, but they can look back as far as 12 months) to compare to your home and adjust its value according to the sale of those properties. A common misconception is that because a home in the neighborhood sold for $850,000, that their home will also appraise and sell for that amount as well. This could be false because an appraiser is going to compare “like and kind” homes. If the home that sold for $850,000 was a rambler and your property is a two-story home, these are not comparable in style and will typically not be used as a comparable sale in the appraiser’s report. Additionally, the total square footage of the home within the same style of home will also be crucial as an appraiser will not compare a 3,000 sq ft home to a 6,000 sq ft home without major adjustments. Appraisers will make adjustments to give value to or subtract from comparable sales if there are slight variances in square footage, additional bathrooms, bedrooms, or if one comparable has a larger garage.
What Should You Expect from the Appraisal Report?
One of three scenarios will unfold when the appraisal report is returned:
The appraisal can have an opinion of value at exactly the contract price. In most cases, this is the value that will be obtained through the appraisal because the appraiser can determine the market value based upon the contract that they have in hand for the current transaction. This also limits the liability of the appraiser if they were ever questioned about their opinion of value on that day.
The appraisal can come in above the agreed upon contract price. This is very rare, even in a seller’s market because once again, the buyer and seller have agreed upon a price and unless the home was severely underpriced, the new sales contract is determining the market demand and thus establishing the price and value of the home.
The appraisal can come in less than the contract price. This is the dreaded scenario for the transaction because the lender will only approve a loan amount up to the appraised value. Unfortunately, this is occurring more frequently in the current market because homes are selling with multiple above list price offers and appraisers can only use historical sales as comparables. This means that the house that is under contract down the street and is $50,000 more than your house cannot be used in an appraisal until the home is sold and the updated price is listed on the MLS. (Multiple Listing Service). The resolution is one of 4 options:
The buyer pays the difference between the appraised value and the contract price of the home.
The seller agrees to reduce the price of the home to the appraised value
The deal collapses. This is obviously the worst scenario, but this also displays the power of the appraiser and the relationship with the lender.
The buyer’s lender can appeal the appraisal, or the buyer can change lenders and petition a new appraisal through that new lender.
The bottom line is the appraiser is simply trying to show on paper how to justify the price that the buyer and the seller have agreed upon.
Closing Thoughts
Understanding the components to how your home is valued allows you to be prepared and make educated choices as to how you can increase the sales price of your home. My hope is that the information from this article can give you a realistic expectation of what to plan for while going through the sales process. If you have any questions about anything real estate, please contact me at brandonrwood19@gmail.com or 801-885-2558.