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You may have welcomed a real estate appraiser into your home and forked over a significant amount of cash for your property to be appraised…
…but do you really know what a real estate appraisal is?
There are many reasons why you might need a real estate appraisal.
A recent real estate appraisal may be necessary to demonstrate why your property taxes should be reduced. Appraisals may be required for probates, estate planning or divorce settlements.
The most common reason for an appraisal is to obtain a mortgage.
Federal and state laws, along with current banking regulations, require that lenders obtain an appraisal for most loans secured by real estate.
Still, if you’re like I was, you’re probably clueless as to how a real estate appraisal actually works! I would routinely grow frustrated with appraisers coming in low on value – thinking that if I put $15,000 into my house, surely the value should be $15,000 higher, right? Not necessarily.
What is an Appraisal?
An appraisal is an objective supported opinion of value of an adequately described piece of property. The appraiser is expected to have sufficient knowledge, training and experience to accurately estimate property value. In this detailed and time consuming report, appraisers use comparable sales together with information about the property being appraised, its neighborhood and community along with the local and national economy, to support the appraised value.
You should remember that an appraiser looks objectively and not subjectively.
An appraiser will most likely look at the house as if empty: four walls, floors and a roof. Very little attention is paid to current owners’ furniture and decor when it comes to determining value. Your immaculate housecleaning, plush furniture and plasma television may make a room look nice and hip but these things do nothing for the value!
Important Tip!
If you are buying a house with the owner carrying the paper (loan), it is well worth the cost to hire an appraiser to make sure you don’t pay more than it is worth. For your protection many real estate agents will write in a purchase contract: this contract is contingent upon the property appraising for the sales price.
How is Value Established?
The value of a house is based upon recent sales of the similar neighboring homes in the market as well as rentals and listing data. Ideally, appraisers want to use sales of properties of the same size, age, room count, condition and with similar amenities and external influences. This rarely happens though, so adjustments have to be made, based on what people will pay extra for.
Examples: extra square footage, bedrooms, fireplace, upgrading, parking facilities, swimming pool, lot size, location and so on. This helps paint a better overall picture. This information is entered on a form, a value for differences is established and comparisons are made to the subject property. Typically a minimum of three verified closed sales with photos are required to establish a value.
Properties appraise for more when they are:
- Well maintained inside and out.
- Located in a good school district.
- Additions are done with the proper building permits.
- Additions conform with and fit well into the existing house.
- Properties throughout the neighborhood are well maintained.
- Not over improved or the largest house on the block.
- Style of the house conforms to those in the neighborhood.
- Zoning changes are not expected or there is not a mixed use.
Remember: Location, location, location!!! You can change everything about a house except it’s location.
What classifies a poor location?
- Located on a feeder street.
- Under an airport flight path.
- In or near a gang territory.
- Center of nightlife activities.
- In a rundown block or neighborhood.
- Next to a school or school yard playground.
- Next to apartments or commercial property.
- In close proximity to a freeway, expressway or railroad.
- Next to a gas station, near municipal garbage or toxic waste dumps.
- Odors from factories, farms and processing plants are routinely noticed.
- The city is affected by the closing of a major employer.
It’s important to THINK about SELLING when you are BUYING!!!!
Location is a big factor in a home’s appraised value. This is most notably felt at the time you sell or refinance. What seems like a bargain when you buy might turn into a real headache when you try to sell. Drive around the neighborhood and note any adverse conditions. You may think you can live with something adverse for the price, but when it’s time to sell you might find buyers won’t.
Important Tip!
Adding onto your house = Always obtain a building permit. A 600 square foot addition built without a permit is given no value on an appraisal. When it is time to sell or refinance, the frustrations of the building permit process will be worth it. Always save copies of the final permit sign offs and keep with your house papers.
Buying a house with an addition? Verify that it was built with a permit prior to closing the sale. Don’t just accept the seller’s word. Get copies of the permits before final sign off. Should you want to refinance or sell at a later date, and the appraiser cannot verify the addition being permitted, no value should be given. The result: no new loan or worse . . . no sale.
Tip!
A one bedroom house or condominium doesn’t appreciate as well and is harder to sell.
You should always try to work with an agent!!! An advantage of
working with a real estate agent is that they can provide you with sales information of similar properties to better guide you on how much to offer. Your agent can provide recent sales “comps” for similar homes in the neighborhood. Finding the list prices is also important. Comparing the list prices with the sale prices tells you exactly what percentage of the list price sellers are getting.
A local real estate agent typically will be more accurate what a home is likely to sell for in a specific neighborhood location.
The bottom line is we are all guilty of occasionally overestimating the value of a property. Especially when a lot of money, hard work and time is put into rehabbing a property, with the hopes of justifying a higher resale price and profiting from flipping the house. I can’t tell you how many times I’ve been frustrated over a lower than
anticipated value.
Just keep in mind that an appraised value is subject to other neighborhood factors beyond the condition of your home or improvements you’ve made to the property. Just revert back to this guide whenever you are going through the appraisal process.
To Your Success!
Aiden Win
Mr. Foreclosure
Get the Investor training You Need
P.S. Remember to check out the Foreclosure Insiders Club to access a list of pre-foreclosures in your area that could be yours for considerably less than their actual market value! Join the Foreclosure Insiders Club to access a list of distressed properties in your area that could be available at bargain by owners looking to avoid bank foreclosure!
