There is a lot of talk these days about how low appraisals are killing real estate deals. Listing agents and home sellers are mad and home buyers are frustrated. Let’s take a look at the role of the appraisal, why an appraisal may come in low and factors that influence home values.
NOTE: This article is the property of UrbanConnectionRealty.com. We have not authorized to to be published on other web sites.
What is the role of the appraisal in a real estate transaction?
The appraisal is done to determine fair market value of a property. In most cases it is ordered by the mortgage lender and will eventually determine the maximum amount the lender will finance.
The appraisal is an important check and balance mechanism for. Without a valid appraisal, we could easily see market swings comparable to the 2003-2007 era and we can all agree we don’t want to go there again.
Why do appraisals come in at less than the amount offered by the home buyer?
An appraisal is often based on sales data from comparable properties. It is not based on what a home seller, real estate agent or home buyer think an individual property is worth. Let me restate this… it doesn’t matter what you think your home is worth, what price your agents agrees to list the home at or what a buyer say’s he’ll pay. If there is a mortgage involved, a professional appraiser will determine market value.
A residential real estate appraiser in Arizona goes through 200 hours of class work followed by over 2000 hours of additional training and mentorship. They have very specialized software and attend lots of CE classes and eat-live-breath home values. That said, they are not always right. They do best when working in neighborhoods they understand or with home styles they have expertise. For example, an appraiser from N. Scottsdale may not understand a 1926 Tudor Revival in Willo Historic, nor would I choose an appraiser from Mesa to value my estate in Paradise Valley. That said, most bring good knowledge and understanding the game.
What are some of the factors considered in appraising a home?
There are many factors involved in determining fair market value of a property including:
- The size of the home is a dominant factor but not the only one. Think $/square foot.
- Number of bedrooms and baths. Note: A bedroom has to have a closet and window to be counted.
- The condition of the property. Dog ugly verses model home perfect will affect the price.
- Age of home. We find this especially true in the historic districts we work. Pre 1930 homes, termed revival style, often have more value than newer properties in the area. In other parts of Phoenix an older home may have less value that a new one due to depreciation.
- Improvements such as pools, landscaping, legal additions, a new roof, and newer quality remodels can all add value.
- Location can make a difference. True golf course properties out perform one just near the golf course; a killer view is a plus and a home on quiet interior lot is worth more than one on a busy street.
What surprises and hurts people most people is confusing upgrades with home maintenance. I don’t know about you but I’d like to get full-credit for the $7,000 I put into new windows this year. In truth I may not get any credit if the comparable homes also have newer windows. The carpet we just installed looks nice but I don’t count on it adding value in an appraisal.
Don’t expect added appraisal value for things like:
- new faucets
- minor landscaping
- added insulation
- new light fixtures
- new hot water heater
The above mentioned items are just part of good home maintenance and not something that adds appraisal value. That said, lack of proper maintenance can hurt you, especially if the comparable homes have been well maintained.
- An enclosed Arizona room seldom counts as livable square footage unless you had the job done professionally and with permits.
- That garage conversion you did may not count either, especially if you didn’t pull permits, raise the height of the floor and upgrade the HVAC systems.
- Guest houses can be an issue. They have to meet certain livability standards and best if the space was added with a permit.
- As you can see, getting a permit for additions is pretty important.
What Can I do if I Get A Low Appraisal?
The appraisal is the property of the home buyer and his or her lender. Thus, if you are the home seller there is not to much you can mandate. the best thing is to talk you’re your Realtor or Broker and ask for counsel. Naturally, if the home buyer is asking you to reduce the sales price because of a low appraisal you are entitled to proof. If you are the home buyer you can ask for clarification of the appraisal. Your best source of advice is your mortgage lender and/or Realtor.
Thanks for spending some time with us. Please note that this is an opinion piece only based on 2 decades in the business and should probably be ignored, much like Click & Clack the tappet brothers.
Gene Urban and Ron Urban
The Urban Team at Realty Executives