Appraisals have many components, but here I've outlined some key facts about appraisals: both buyers and sellers need to know how an appraisal impacts the purchase of a home.
Licensed home appraisers are used by lenders to determine home values. The amount of the mortgage granted is equal to the appraised value of the home. Every sales transaction is different: sometimes cash buyers will order an appraisal, and for financed purchases, if the value is less than the purchase price, the buyer may supplement the mortgage amount with cash. It depends upon the type of mortgage.
Lenders do not pick appraisers due to ethical reasons, but they are pulled from a pool in a rotation so that there is no conflict of interest. Appraisers should also be local and familiar with the geographical area of the home and comparables (sold properties used for comparison or "comps"). The comps are usually recent sales of similar homes within a short distance from the appraised home (subject property). Usually living space is up to +or- 20% of the subject to be a valid comp.
How is the estimated home value determined?
The comps are adjusted to best match the subject if the same features were present. If the subject has a pool and the comp does not, the appraiser will add the appraised value of the pool (not what the seller paid) to the comp sales price. If the subject has a 3 car garage and the comp has 2, the value of the 3rd car garage will be added to the sales price of the comp. This is a common sales comparison approach used in resale home appraisals. Adjustment values vary depending upon the location of the properties, i.e.; cost per square foot of a rural home is different than a waterfront condo on the beach.
What items are adjusted?
Square footage of living space, pool/spa, number of garages, view (lake view,etc.), age, roof type, and condition of the home are the common adjustments. These are adjusted to match the subject property to determine an estimate of value, often in a columnar fashion with net adjustments and sales price of each comp, which are then averaged. There are also other factors considered:
Housing Trends: Are home values increasing or decreasing? In the Naples Florida area we are seeing an upswing which has impacted appraisals.* How is supply meeting demand? With high demand our inventory of homes in Southwest Florida has shrunk. What is the average marketing time? (days on the market) That relates to inventory, often homes sell quickly. Another crucial component is Condition: For buyers as well, the home needs to be free of clutter for easy access throughout, and small repairs should be done. FHA loans have specific property requirements.
The appraiser will also note additional features such as security system, hurricane shutters, etc.
When an appraiser is viewing and measuring the property for sale, I meet him or her and bring the best comparables available. I also walk the property so that nothing is missed. Appraisers are busy and view hundreds of homes, so the information is critical and first impressions count, as with buyers!
* Determining a list price for a home seller is also an important component of the sales process. Having done BPO's ( unofficial mini appraisals by a licensed Realtor) for lenders, and worked with appraisers, I had to evaluate the current real estate market for a seller in Golden Gate Estates. What I discovered was that the number of comps for a similar large home in the area were almost absent, and the house had some great features and appeal that were not common to most homes in that area.
We listed the house at a much higher price than the purchase price of only a year ago, and sold it on the third showing. Within six months after the sale, three appraisers contacted me since they were using it as a comp. They questioned if there were seller concessions, home improvements, or any other added factor that raised the sales price. The answer was "no." I explained it was an example of buyer demand, and the appraisal that was done for that buyer was EQUAL to the sales price. Again, every transaction is different..........
This is just a partial description of appraisals and is limited in scope for a blog format, and is not a legal reference but is solely for informational purposes from a licensed Realtor.