Published by Jim Droz
Appraisal changes instituted because of the financial crisis were intended to eliminate pressure on appraisers that occasionally led to inflated valuations during the housing boom. So much for that theory because critics are now saying that the changes resulted in conservative valuations and the increased use of appraisers with little knowledge of local market conditions. Other things appraisers have been taking heat for recently are that home values aren’t matching a listing or contract’s price and valuations are unfairly weighing distressed properties into the equation.
The best thing you can do as an agent is get educated on the appraisal process and the report itself. It’s another thing to add to your to-do list or to-know list, but the process is becoming increasingly heated and affects buyers and sellers, so no matter who you’re working with it could delay or derail possible transactions.
“Obviously, the market is depressed — home prices have fallen far below the values of a few years ago,” Appraisal Institute president Sara Stephens said in a recent statement responding to the criticism. “Many homes simply aren’t worth what their owners think they are.”
Buyers and sellers “shouldn’t assume an appraisal is somehow ‘wrong’ if it doesn’t match the listing or contract price,” Stephens added. “There’s no reason to assume the contract price is the ‘correct’ price simply because it’s higher than the appraisal.”
Here are some factors appraisers look for and components they consider when determining a home’s value. If you’re familiar with them, pass them on to your clients so they can better understand the process (if possible).
Incentives and concessions: Buying low and getting extras has been in vogue the past few years because of the housing downturn. Whether that trend continues now that things are stabilizing isn’t known, but the price set initially might not be the final price once concessions are factored in or out. Appraisers only care about that final number.
Closing date: Appraisers want prices from the most recently closed transactions, so be up to date on the current trends in your area.
Condition: When markets are healthy, blemishes matter less, but that hasn’t been the case in recent years with buyers demanding improvements or a reduction in price. The difference in value isn’t just the repair costs but the time and effort needed to make them, so it’s better if sellers do the work in advance.
Foreclosures: While a foreclosure shouldn’t be compared to a standard sale, appraisers are starting to consider these lower values when appraising homes. If your client lives in a neighborhood where several homes are abandoned, you might to want caution your seller that, even though it isn’t their fault, the foreclosures could hurt their bottom line.
Area: If a house is in a vibrant or growing part of town, the value can be expected to rise. A location that’s perceived as safe also attracts buyers.
Site: Location, view, topography, lot size, utilities, zoning and landscaping features all come into play when appraisers consider a home’s value.
Design: Quality of construction, the finish work, condition of appliances and any distinguishing features also are important factors.
Condition: The age of the house, deterioration, renovation work and any added features are other things appraisers look for.
Safety: Appraisers study the structural integrity of the home and whether or not it’s in compliance with city codes.
Conformity: Curb appeal and how the house fits into the neighborhood also are signs appraisers – and potential buyers – look for. Making the house sparkle is one of the easier things your seller can do to add to its value and appeal.