Why Didn’t My Home Appraise Higher?
A friend (I’ll call him Art) recently had his home appraised. When the appraisal came back, he was shocked to see that his home appraised for less than two homes nearby that had recently sold. Art’s home has an upgraded kitchen and newer carpet. His home is more aesthetically pleasing than the other two homes. His yard is landscaped and far more beautiful than the comparable homes’ yards.
Art knew how much those other homes sold for. Because of that, he didn’t understand why his home didn’t appraise for higher than his neighbors’ homes.
The market was hot and homes were selling for $10 to $20 thousand more than the asking price. Home values were skyrocketing and rising weekly.
In Art’s eyes, the valuation of his home wasn’t keeping up with the current market’s trajectory. However, he was refinancing and wasn’t worried about getting the max appraisal, so Art didn’t question the results. But still, he was baffled.
I Just Don’t Get It!
Many people don’t understand home appraisals and how appraisers are legally bound to operate. Appraising is an often misunderstood part of the refinance and mortgage process. If you’re an appraiser and you’re reading this, you already know the details. But do your customers understand how an appraisal works? This is a good opportunity to educate them! Share this article with them and chat about the appraisal process. The better the appraisal process is understood, the less customers will question the results!
Let’s explore how appraisals work!
What Is An Appraisal?
An appraisal is an unbiased valuation of the fair market value of a home. An important key for buyers to keep in mind, appraisals are for the benefit of the lender, not just for the the buyer! Lenders make sure that they are lending the right amount of money for a home. If a buyer defaults on the loan, the lender wants to be able to recoup the cost of the home.
A lender protects themselves by ordering an appraisal. The appraisal alerts the lender as to the value of the home. So if the home is worth less than the buyer wants to borrow, the lender will reject the loan.
Appraisals are for the benefit of the buyer too. An appraisal confirms a home’s value. While a low appraisal gives the buyer the opportunity to renegotiate the sale, a high appraisal gives the buyer equity at closing!
What is an Appraiser?
Appraisers are highly educated and well-trained. They must keep up with yearly concurrent education requirements. Appraisers are also licensed and certified. In addition, according to federal regulations, they must be impartial and have no direct or indirect interest in the transaction. Therefore, if an appraiser steps beyond these requirements, they can can face severe consequences.
Appraisers are monitored by state boards. They are also monitored by Government Sponsored Entities (GSEs) Fannie Mae and Freddie Mac. So, rest assured, your appraiser is impartial and thorough. If he isn’t, he will face consequences which affect his reputation, income, and even his career!
Valuing a Home
The value of a home is created using several components:
- Recent sales from similar properties ( “comparables” or “comps”) or price of materials
- Current condition of the property
- Square footage (GLA)
- Number of bedrooms and bathrooms
- Lot size
- Location of the property
- Current market trends
- And more!
The Appraisal Report
An appraiser researches available public information online and does a physical inspection of the home. Then, using this information, their training, and oftentimes a quality appraisal data management software (such as DataMaster), the appraiser creates a report. The report includes:
- Exterior sketch of the building
- Explanation of how the square footage was calculated
- Street map which includes the property and comps
- Photographs of the home’s front, back, and border street
- Exterior front photographs of each comp
- Market sales data
- Public land records
- Analysis of “highest and best use” of the property
- And other applicable information
How Does the Appraiser Determine Value?
Keven Ewell, Utah Appraisal Board member, appraisal business owner, and DataMaster appraiser, explains that a home’s value is based:
“On the most recent closed sales rather than on historical sales or pending sales; the appraised value versus the sales price. We must look back to find out what the home is worth. We must look at the market analysis and where we are coming from.
Keven also shared the factors that he considers in determining the market value as a home.
It is the most probable price which a property would be in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeable and assuming the prices are not affected by undue stimuli.
Furthermore, Keven shared the conditions requisite to a fair sale:
- Buyer and Seller are typically motivated
- Both parties are well-informed and well-advised, and each act in what he or she considers their own best interest
- A reasonable time is allowed for exposure in the open market
- Payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable to cash
- Price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions
Home appraisals are more complicated than most home buyers realize. Once a buyer understands the appraisal process and the legal restraints that an appraiser must operate under, it’s less likely that they will be upset by the appraisal results.