What Do Appraisers Look For to Provide Accurate Home Values?
There is a significant difference between what a real estate broker thinks a property may be worth based on a market evaluation and an official appraisal. Be careful not to confuse a simple market evaluation or a home inspection with a full appraisal. A home inspection is about a home’s condition and not about the home’s value.
Appraisals are legal documents that represent a written professional opinion made by a certified appraiser about the value of a home that can be relied upon for certain purposes. An appraiser estimates the value of the property; however, the valuation is not just a simple guess.
These estimates are made by an experienced appraiser after considering many important factors. The appraiser visits the property to make a physical inspection. The valuation of the property depends partially on the results of this physical inspection. Checking the value of the home with an online home appraisal is a good way to get a rough idea about what a home is worth for comparison purposes.
What are appraisals used for?
Appraisals provide accurate home values. They are useful for homeowners, homebuyers, insurance underwriters, banks, lending institutions, and, in some cases, governmental authorities.
Homeowners might use an appraisal of their home to set the value of a home for resale. A homebuyer may use an appraisal to make sure a property being acquired is purchased at a fair price. Insurance underwriters use an appraisal to determine the amount of insurance coverage that is appropriate to cover the cost of repair or replacement if a home is damaged or destroyed.
Banks and other lending institutions use an appraisal to help determine how much they are willing to lend on a specific property. A governmental authority that uses a process called eminent domain to condemn and acquire a privately-owned property for public use, uses an appraisal of the property. The appraisal determines the amount that the property owner should be compensated when the government seizes the property by legal action.
How much do appraisals cost?
Bankrate reports that appraisals cost from $300 to $450 depending on the price of the home, its size, where it is located, and the condition of the property. In a typical real estate sales transaction, the buyer pays the fee for the appraisal at the closing because the buyer is the one that needs to use the appraisal to secure financing for the purchase of the property.
Do appraisers need a license?
Yes, an appraiser must be licensed to make an appraisal in the state where the property is located. If you are going to pay for an appraisal be sure to check with the state authority to see that the appraiser has a license and the license is in good standing.
It is also a wise idea to see if the appraiser carries Errors & Omissions (E&O) insurance. This type of insurance covers certain costly mistakes that an appraiser can make, which may cause financial damages to other parties.
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What Do Appraisers Look For?
Appraisers look for specific things when making an appraisal of a home. An appraiser will make a review of the home inspection report and include a copy of it in the appraisal report. An appraiser will look for comparables ("comps"), which are homes that are as similar as possible to the one being appraised. These comps are used for the estimate of the appraisal value of a similar home.
An appraiser will take a look at the condition of the neighborhood, characteristics of the community, and note any significant environmental problems. Finally, an appraiser will evaluate any market dynamics that might influence the valuation of the home.
Some things are beyond a homeowner’s control, such as the market dynamics. Nevertheless, many things on the appraiser’s checklist can be addressed by a homeowner to help the appraisal come in at the level necessary to make a sale go through without difficulty.
The Appraiser’s Checklist
Exterior – The appraisal may be a higher amount if the home has “curb appeal.”
Paint: It is wise for the home to have a fresh coat of exterior paint.
Siding: Siding is checked for damage and warping.
Foundation: The appraiser will look for obvious damage and cracks in the foundation, which can be observed without having to enter the crawl space under the house.
Landscaping: Well-manicured landscaping and low-water-use trees and shrubs are pluses.
Garage: The appraiser will check for a working garage door.
Roof: Damage to the roof, such as missing roof tiles, will be noted by the appraiser.
Decks: Raised decks should have sturdy handrails.
Steps: Steps need to have secure handrails.
Driveway and Sidewalks/Paths: The appraiser will look for damage to the driveway and cracks in the sidewalks/paths.
Electrical Outlets: All exterior outlets must be three-prong and grounded.
Amenities: Amenities might include a swimming pool, hot tub, water features, and even simple things like blooming flowers in large pots that line a cobblestone walkway.
Interior – Any minor repairs should be made. Repairs that would cost $500 or more will be deducted from the value estimate.
Bedrooms, Bathrooms: The appraiser will count the bedrooms and bathrooms.
Size: The appraiser will calculate the size of the house in square feet.
Plumbing: The appraiser will look for stains near spouts and working plumbing fixtures. The appraiser will check for running water, properly flushing toilets, sinks that drain correctly, and hot water.
Paint: If the house was built before 1979 there is a concern that the house may contain lead-based paint. This requires disclosure to potential buyers.
Utilities: Functional air-conditioning, heating, electricity, and water will be checked.
Leaks: The appraiser will check for water stains on the ceiling that may be evidence of roof leaks.
Walls and Ceilings: Besides stains, an appraiser looks for cracks and signs that the house is shifting.
Doors: Doors that open and close properly show that the house is not shifting due to foundation problems. Doors leading to the exterior need to be secure.
Windows: Windows should not be cracked, should not leak, and open easily.
Flooring: Carpeting and flooring should be in excellent condition.
Electrical outlets: Any outlets within 10 feet of a water source must be grounded.
What Do Appraisers Look For: In a Home and Pest Inspection?
An appraiser will want to review and make a copy of the home inspection and pest inspection. These other two inspections are made by separate entities.
The appraiser will note any repairs that the home inspection suggests need to be made. Of particular interest to the appraiser is if the home inspection uncovered the need for major repairs that could seriously impact the home’s value. Usually, it is better to have such repairs made before listing a property for sale.
Any pest problems that come up in the pest inspection will be noted for follow up as well. If the pest inspection found any evidence of termites, dry root, or structural damage caused by pest infestation, this will guide the appraiser to make a further investigation into the extent of the damage.
If you have already made repairs that are shown in the home inspection reports as needed, be sure to give the appraiser a copy of the receipt for the repairs made so that the value of the home is not reduced. Most repairs should be performed by a licensed building contractor or another licensed third party. This will convince the appraiser that the repairs were done properly and up to the building code standards, as required.
What Do Appraisers Look For: In Comparables?
Comparables (called “comps”) are homes as close to the one being appraised as possible. A decent comp is a home of the same size with the same number of bedrooms and bathrooms. It helps if the home is built around the same time and of a similar style as the home being appraised.
An appraiser must find at least three comparable homes that sold within the past six months. These sales will be used to determine the value of the home being appraised.
Sometimes a problem comes up in that the appraiser is not able to find three comps that satisfy the requirements. In such a case, the estimate of a home's value may be wrong. If the appraised value is higher than the homeowner thinks it is, this usually does not cause as much of a problem as if the appraisal value is lower than the homeowner thinks it should be.
Lenders typically need the appraised value of the home to meet a certain figure. The lender gives a loan that is a percentage of the appraised value. If the appraised value comes in too low, the amount the lender is willing to lend might be too low for the buyer to purchase the property at a price that the seller is willing to accept.
One way to deal with this problem is to challenge the choice of comps used by the appraiser and ask the appraiser to substitute another comp that has a higher value. If this fails, a new appraisal might be required from a different professional appraiser to keep the sale from falling through.
Appraisers may have a different opinion about a property’s value. However, appraisers will not usually adjust the value without having some convincing, logical reason to do so because they risk losing their license if they do this corruptly and may face a lawsuit for overvaluing a property if things go wrong with the transaction in the future.
What Do Appraisers Look For: In Neighborhoods?
A modest house in a luxury neighborhood will get the benefit of the value of the houses nearby. A luxury house in a rundown neighborhood may have a lower property value than the same house placed in a nicer neighborhood.
The appraiser will drive around the neighborhood paying careful attention to the houses next door, on the same block, and across the street from the home being appraised. Any nuisances that are readily observable may affect the appraiser’s valuation. An example of a nuisance, which could lower the property value, would be having a noticeable bad smell in the air due to being downwind from an industrial site or a farm.
On the plus side, proximity to high-quality schools, shopping centers, parks, and community centers adds value to a home. A nice suburban neighborhood that is within the distance that makes an easy commute to a nearby large metropolitan area is usually a desirable trait.
The gentrification of some neighborhoods that are converted from areas of previous blight into thriving communities are candidates for rapid value appreciation. It helps if the home is located on the edge of one of these new emerging areas, which may positively impact its valuation.
What Do Appraisers Look For: In Community Characteristics?
The appraiser will evaluate the crime rate, real estate appreciation values, population size, and demographics to determine if the community is growing or losing members over time. Property taxes are important. Homeowners prefer lower tax bills; however, areas with higher property taxes may be nicer places to live. This is reflected in the home values.
Cost-of-living in the community and the amenities offered are also factors that an appraiser may take into consideration. A cost-of-living for housing expenses that is higher than the state average indicates a desirable neighborhood.
The percentage of owner-occupied homes indicates neighborhood stability with long-term residents. The average age of residents tells if the area is family-friendly or weighted more toward retirees. Communities with buildings of historical significance may have some properties with higher values due to being listed in the National Register of Historic Places.
Any special characteristics of the community may increase the property values, such as a town being located near a famous college campus or a major medical center.
What Do Appraisers Look For: In Environmental Problems?
Environmental problems, which are significant, need to be disclosed to potential buyers and also to the appraiser. If the house is built on a toxic landfill that is leaking methane gas, the value is going to suffer substantially. Severe environmental problems may make the house uninsurable and prevent its sale.
Environmental problems may be on the property’s lot or sufficiently nearby to cause problems that make it difficult for the owner to enjoy the property fully. An example is being downstream from a pollution site that contaminates the groundwater.
Fun fact:
It is interesting to note that psychological problems such as a house supposedly being haunted by ghosts do not have to be disclosed to potential buyers. Alternatively, a house that is supposedly haunted may sell for a premium to a buyer who is interested in that phenomenon.
What Do Appraisers Look For: In Market Dynamics?
An appraiser is supposed to consider the highest valuation as the “best use” of a property. For example, a rundown, condemned shack may be nearly worthless except if it sits on a lot in the middle of a busy metropolis on the main thoroughfare. Then, it may be worth millions based on the land value alone.
In terms of market dynamics, what an appraiser is looking for is something that would likely impact the property value substantially within the following six months after the property is appraised. On the plus side, this might be a change in zoning to allow better use of the property or a new highway coming through the area that will bring increased traffic flow to increase a property’s commercial potential.
If you know of some special circumstances that would increase the value of a property that you want to be appraised, be sure to let the appraiser know about them so those aspects can be taken under consideration.
What Can You Do If You Disagree With an Appraisal?
If you are hiring an appraiser, one way to avoid problems with an appraisal is to openly discuss what the appraisal is needed for and how it will be used. Do this before the appraiser does the work. An experienced appraiser should be able to tell you very quickly if the appraised value you are seeking is within the range of possibilities.
Problems may arise when the appraiser is not hired by you, such as when a lender gets an appraisal using their appraiser. Making an accurate appraisal is part analysis mixed with and a bit of artfulness that comes from experience.
A talented appraiser may notice things, like a valuable custom marble fireplace, which a less-skilled appraiser might miss and not include in the valuation. Using evidence of value, such as the cost of installation of such a marble fireplace, is one way to get an appraiser to increase the valuation.
Conclusion
In real estate sales, appraisals are a key component necessary to support the transaction. Now, that you know what appraisers look for, you are better prepared to adjust the things that can get the highest appraisal possible when selling your home.
If needed for negotiation purposes when buying a home, you can also challenge an overvaluation by pointing out the defects in how the appraisal was made, such as using inappropriate comps or not considering environmental factors.