What is a home appraisal all about
The Home Appraisal
Purpose of the appraisal
Most homeowners have experienced at one time or another, the slightly mysterious process of a real estate appraisal. To mystery is often added anxiety as the outcome of the appraisal is frequently the key determinant of whether a sale or refinance is completed. The purpose of the appraisal is to provide an honest and accurate estimate of the market value of property based on comparisons to nearby properties that have been through an actual sale process in a recent time period, generally six months, and are physically similar to the property in question, a. k. a., the subject property.
The need to obtain an estimate of market value may arise from a variety of situations, such as:
· The owner may just want to know how much their house is worth for planning purposes.
· A loan for a sale or refinance is desired, and the lender must be assured that the property is actually worth the amount specified.
· Due to divorce or probate judgments, an overall value is needed to determine the fractional value to multiple owners.
In general, the value of the property as determined by the appraisal should be, to the greatest extent possible, independent of the reason that the appraisal is required. More specifically, the appraised value should be an estimate of what an actual, informed buyer would pay for the property in the area’s typical market conditions, and with consideration of other choices available to the buyer.
How arrangements are made
Commonly, a request for an appraisal is generated when a buyer (or an owner desiring to refinance an existing loan) applies for a home loan at a bank or through a mortgage broker. At some point in the process the lending institution will order an appraisal. The selection of the appraiser by the lender used to be a fairly open process from the lender’s perspective. That is to say, they could order the appraisal from just about any appraiser which they or their company preferred. In the post mortgage-meltdown-regulation era, new federal rules require the ordering of the appraisal to be much more neutral. Most lenders for most loans will now contact an appraisal management firm, which is basically a clearing house type operation, who will in turn contact and contract an appraiser. Ideally, the lender, the buyer, and the seller, have no control over who is selected to do the appraisal, and they are supposed to have very little contact with the appraiser other than to communicate scheduling issues.
For a full appraisal (as opposed to a “drive by”) the appraiser will generally coordinate a time that they will come to the subject property to make measurements and take some photographs. The measurements are made to get an independent calculation of the square footage of the house. Appraisers within a large region attempt to make these measurements in similar fashion to develop consistency across the region. A typical method of measurement is to obtain the total square footage of the footprint of the house by measuring the outside perimeter of the house and then subtracting out the interior “non-living” spaces such a garage or a utility closet. For a two story house the bottom floor is determined in this way and for the second floor, the interior measurements are taken and totaled. It is important to note that the square footage value used in the appraisal is the square footage of the actual living space, that is, the parts of the house that are completely finished and supplied with the same level of service (plumbing, heat, air, etc.) as the remainder of the house. So, for example, if the house has an unfinished upstairs room, that space would not be included in the square footage although some value for that space might be added in to the value calculation because it might have some value compared to vacant attic space.
How value is determined
In addition to measuring the subject property, the appraiser will also examine available data pertaining to appropriately comparable properties, a. k. a., the comps. Comps are selected based on how recently they went through a sale and how similar they are to the subject in terms of size, age, and condition. After finding several similar comps (typically three) suitable for use in the appraisal, the appraiser begins to evaluate the difference between the comps and the subject and makes standard adjustments to the comps in order to make an “apples to apples” comparison. For example, if the comp is somewhat larger than the subject, an amount is calculated to subtract from the value of the comp to determine what the value of the comp should be, all other things being equal, if it was the same size as the subject. Once all the adjustments are made to all the comps, the resulting values are used to arrive at an estimate of the market value of the subject.
Issues that affect value
There are a variety of issues that may make it difficult for the comps to support the supposed value of the subject or, more specifically, may make it difficult to find comps that support the supposed value of the subject.
Here are a few common issues:
- The house may be unusual for it’s local area, e. g., a log home in an area of brick homes.
- The house may be altered in some exceptional way, e. g., it’s the only house in the neighborhood in which the garage has been converted to a den. Or maybe it’s the only 2-car garage house in a neighborhood full of 3-car garage houses.
- The finish of the house may not match the local area, e. g., it may have extra thick walls that increase the cost to build the house, but no other houses in the neighborhood have that expense built in to them.
- Otherwise suitable comps may be in a more or less desireable school district.