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What is an appraisal?
An appraisal is a process that is performed on behalf of the lender providing financing for a home. Basically, the lender needs written, justified proof that the home is worth what it is selling for. The lender wants to insure they are making a sound investment when providing financing. This is an essential part of a real estate transaction, and the place where many sales can potentially fall apart, if a property is sold at an aggressive price and if you aren’t prepared and/or have a professional working for you. I like to say "you can find a buyer willing to pay your price, but if the bank won’t provide the financing, you won’t get to the closing table!"
Especially with condos, appraisal can be a challenge. Since many condos are so similar, particularly in size, appraisers must compare apples to apples whenever possible. Therefore, if you price your unit $20,000 above what the unit above you sold for 2 months ago, you may have problems!
Appraisers must prove to the lender that the price is justified. In order to do this, they use comparable sales. The main factors in determining a comparable sale in a condo are:
- Size
- View
- Condition
- Association dues
- Parking facilities
- Amenities
If there are recent sales within the building, these must be used as comps in most situations. If there have not been any recent sales, the appraiser will look to the most similar properties in the immediate area and make adjustments as needed.
What happens if a property does not appraise for the sale price?
Generally, there are a couple different options. These are:
- Pay for a new appraisal (generally $300 - $450); usually at the Seller’s expense
- Adjust the sale price to the appraised value
- Offer secondary financing for the difference (Contract for Deed, etc.)
- In some cases the buyer can put more money down to make up the difference. However, many lenders will require the property appraise for the sale price, not the loan amount, so this may not be an option.
- Declare the purchase null and void, refund the buyer’s earnest money, and start over, hoping for a cash purchase, more sales to build value, or a better appraisal next time around!
Help the Appraiser - and Yourself
Provide your appraiser with any information or records that may help determine the proper market value for your home. Some examples include a property survey, mortgage, recent sales and listings in the area, the title policy, items remaining with the home and a "brag" sheet about the home, pointing out any special features and improvements. You should also provide the comparable listings and sales data from your market analysis so it can be considered in the appraisal.
General Information - How Appraisers Estimate Value
To arrive at a market value estimate, an appraiser must consider both general and specific data as well as a comparison of similar homes. General data includes regional, city and neighborhood information and incorporates physical, economic and social factors that may influence property value. After collecting the general data, the appraiser analyzes the relevant specific data. If the on-site appraisal inspection seems to move along at a relatively rapid pace, remember an appraiser is an informed professional whose trained eye misses little.
Your appraiser will consider the following:
- Supply and Demand
In appraising your property, the appraiser will consider local supply and demand factors such as: How many homes are for sale in your immediate neighborhood? How quickly are they being sold? What are the conditions surrounding the sales? The number of people buying homes and the number of homes on the market affect property values.
- Economic Conditions
Economic conditions vary from region to region. Single-industry economies, strikes, plant closings, re-zonings and outgoing corporations can have a negative impact on property values. However, new plant openings, incoming corporations or locally awarded contracts can have an uplifting effect.
- Financing Conditions
Both cost (such as interest rates or discount points) and availability of mortgage financing have a substantial impact on housing prices. If financing is costly or scarce and your home has a high-balance assumable mortgage with a low interest rate, its market value may be enhanced.
- View from the Outside
On first seeing your house from the street, what will a prospective buyer think? Does the general condition of the home and lot contribute to the home's attractiveness? If you can enhance your property's "curb appeal," do so. Other appraisal considerations include: Is there popular demand for your architectural style? Is your home on a busy or secluded street? Is the street paved? Does it have a sidewalk? Does your community have a public water supply and sewage systems, or do you have a well and septic system?
- Inside Your Home
How will a prospective buyer feel when entering your home? Does the overall condition reflect pride of ownership? Does the floor plan afford a satisfactory flow of traffic? Is closet space ample, and is the kitchen spacious and up-to-date? The appraiser will record the number and dimensions of rooms. Quality of construction, floor coverings, paint, wallpaper, age, type and condition of kitchen appliances and other factors that reflect the overall condition of your house will be closely observed by the appraiser.
- Other Factors
Appraisals are affected by many factors: a fireplace, lot size, a garage "under" versus one that is attached or detached, a screened porch as opposed to an open deck, a swimming pool, tennis court and even the electrical system (ample circuits for anticipated demand). The method of heating as well as energy savers, such as insulation, are significant factors in today's environment.
- The Time Factor
The appraiser must consider the time element. Housing demand, mortgage money availability and interest rates can change substantially over a period of time. The appraiser will consider the recent real estate market as well as the future market in determining the sales price of your home.
- Comparison with Similar Homes
An appraisal isn't complete unless your property is compared with similar homes - both in terms of current listings and recent sales. Current listings in a comparable price range being offered in the marketplace are your competition. These listings affect the marketability of your home and must be considered when determining value. As for comparable sale analysis, it's one of the most important elements in a professional appraisal. Appraisers are instructed to select at least three comparable properties for comparison. Ideally, each will be in the general neighborhood of the appraised home, similar in size, style and construction, and sold within the last three or four months. Such criteria can't always be met, but the appraiser will make every effort to find the best comparable sales. Appraisers use a comprehensive data bank of homes to find satisfactory comparables. Although properties that are substantially different are difficult to compare, appraisers have developed methods to adjust values for valid comparison. By using the Broker's Market Analysis your real estate agent provided, you can give the appraiser a list of comparable listings and recent sales. While not absolutely bound to use them, the appraiser will carefully consider each in developing the market value of your property. Adjustments will be made to compensate for any differences that significantly affect market value, such as date and terms of the sale and location or architectural style of the home.
About Improvements
Improvement adjustments reflect the appraiser's estimate of market value rather than the original or replacement cost. Certain improvements, such as a swimming pool, may not be valued as highly by prospective purchasers as their cost would indicate. Surprisingly enough, a property may be over-improved. Your landscaping may be superior to that of your neighbors. You may have a cabana and swimming pool. However, it's often difficult to sell a house for $90,000 in an area of $60,000 homes. Along the same lines, your interior decor may be unique, but could have limited appeal. The appraiser is asked for opinion: "Will this property sell without any modifications to its current conditions?" Because home selection is a highly personal and subjective process, an appraiser's estimate may be higher or lower than the eventual sales price. Nevertheless, the established value represents the most accurate means available for projecting what your house will sell for on the open market.
Satisfaction with an Established Value Offer
There are always circumstances where people believe their homes are worth more than the established values. An appraisal is only an estimate of value, and an established value offer is the average of the appraisals. The Society of Real Estate Appraisers suggests you remember the following points when evaluating an appraisal:
A seller won't necessarily receive a return on his or her entire investment when selling property. Money spent on repairs or maintenance usually cannot be recovered when selling.
- Improvements or additions to a home usually don't increase the value by as much as their cost. An improvement that appeals to one owner may displease another, or have no appeal at all.
- Appraisers have access to reliable information on sales that the average homeowner doesn't have. To ask a friend or acquaintance how much his house sold for and use that as a comparison of values can be misleading. Even if your friend is willing to disclose the actual price, conditions surrounding the sale may have been entirely different from those in the sale of your property.
- The rise of construction costs and prices in the real estate market since the purchase of your home might indicate a higher value today. However, the appraiser may find that these increases in value have been offset by depreciation of the property due to age, style changes, natural wear and tear or postponement of needed repairs.
- Remember to have your agent complete the Broker's Market Analysis form as part of the appraisal process. This ensures that comparable home sales will be considered.
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