Appraisal Value: How does an Appraiser Determine?

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Real Estate

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By: Darrell Catmull is the principal broker for Destiny Real Estate in Salt Lake City. He is a regular writer for the Experts Contributor Program.


How Do Appraisers Determine Home Value?

Can a homeowner do anything during an appraisal to sway how much the home is worth?
Despite what many believe, appraisers primarily represent lenders and confirm a property’s value rather than determine the value. Appraisers are versed in reconciling a value for a buyer and seller to agree upon in a purchase contract.

To answer how appraisers do this, it’s useful to know the 10 sections in a standard Uniform Residential Appraisal Report that they use:

• Purpose

• Subject

• Sales history

• Neighborhood

• Site

• Improvements

• Sales comparison approach

• Cost approach

• Income approach

• Reconciliation (where the opinion of final value is stated)

The income and cost approaches are used for specific purposes. The sections that have the most weight in a residential appraisal’s final value are sales history and neighborhood.

What qualifications does an appraiser need?
Realizing what’s involved in becoming a licensed appraiser today is useful. Typical requirements to be a licensed appraiser include completing 165 hours of education from a certified pre-licensing school, passing an intensive exam and logging 2,000 hours of experience within five years. There are three more levels that require more education and considerable experience.

Considering the requirements to become licensed, it would seem logical to assume an appraiser’s opinion of value is more qualified than a full-time, veteran real estate agent’s.

But during a continuing education class I attended, the instructor, who was an appraiser, stated that real estate agents have an advantage in determining value. Naturally, I sat up in my chair, eager to hear his explanation. The simple answer surprised me: An appraiser doesn’t go inside homes with buyers. Instead, appraisers rely heavily on the photographs and description the listing agent wrote.
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How do appraisers choose comparable properties?
Because descriptions and photographs can be deceiving, a diligent appraiser will occasionally interview the listing or selling agent to learn more about the comparable property he is planning to use. Appraisers use comparable properties to ensure the home is accurately valued for its neighborhood. But appraisers often have their hands tied.

A new mortgage lender might require that the comparable properties fit certain selection criteria for a given market. For example, in an emerging buyer’s market—a market with declining values—a new mortgage underwriter might want comparable properties to be:

• Located within one mile of the subject

• Built within 10 years, plus or minus, of the other properties in question

• Within 15 percent, though sometimes more or less, of a certain square footage

An appraiser also must choose two comparable properties that have sold within 60 days and one within six months of the appraisal date.

In a neutral market or emerging seller’s market—a market with appreciating value—the criteria are similar to the declining market above, but lenders give appraisers more discretion. What if you want an expert opinion when a bank or lender is not involved? Chances are that’s not going to affect the appraiser’s opinion. The above criteria are prudent whether a real estate broker or an appraiser is performing the evaluation.

How Much Does a Home Appraisal Cost?
Selling or buying a home? Learn what factors determine a home’s appraised value and what affects an appraisal’s costs.
How quality labels affect your home value
When the appraiser comes to measure and take pictures, it seems logical that they should know about all recent improvements. Naturally, you want her to know about the newer roof, furnace, top-of-the-line flooring, remodeled kitchen and bathrooms and designer touches that make your property above average. Appraisers typically have six labels they can give your property: Poor, Fair, Average, Good, Very Good and Excellent.

This is where your hard earned money and excellent choices may let you down. Because appraisers can’t feel, touch, see and smell the comparable properties, they are inclined to give all of them Average or Good ratings. To add insult to injury, even if the appraiser gives your property Very Good and gives the comparable properties an Average rating, the dollar-for-dollar adjustment is based on a determination by a company called Marshall & Swift — and in my experience, it’s a mere percentage of what you actually invested or what those improvements might cost today.

It’s safe for appraisers to deem the subject and the comparable properties Average or Good. However, this practice can be a disservice sometimes—for example, when the subject property is stuck in a 1984 time capsule.

Let’s suppose a veteran agent recommends an asking price of $195,000 on a property with '80s décor and appliances, and an appraiser recommends $210,000. After dozens of showings, the seller probably won’t have one full-price offer in a strong seller’s market. When the property finally sells, it will likely garner almost $20,000 less than what the appraiser deemed fair market value. The problem occurred because the appraiser should have used Fair condition, which Marshall & Swift deems as badly worn and in need of complete remodeling, rather than Average or Good.

Can you change an appraiser's property value estimate?
Appraisers are confident in their work, and there is very little, if anything, you can do to affect the final value. You might consider scrutinizing the appraisal, getting a second opinion or maybe contacting a full-time, veteran real estate broker, who has logged thousands of hours visiting properties with buyers and sellers for help.

A version of this article appeared on the Destiny Real Estate blog.

As of September 5, 2016, this service provider was highly rated on Angie's List. Ratings are subject to change based on consumer feedback, so check Angie's List for the most up-to-date reviews. The views expressed by this author do not necessarily reflect those of Angie's List.

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