What is an Appraisal?

An appraisal is an opinion of value from a licensed or certified appraiser. The Appraisal Institute states on their website:

An appraisal is a professional appraiser’s opinion of value. The preparation of an appraisal involves research into appropriate market areas; the assembly and analysis of information pertinent to a property; and the knowledge, experience, and professional judgment of the appraiser. Appraisals may be required for any type of property, including single-family homes, apartment buildings and condominiums, office buildings, shopping centers, industrial sites, and farms. The reasons for performing a real property appraisal are just as varied. They are usually required whenever real property is sold, mortgaged, taxed, insured, or developed. For example, appraisals are prepared for:

• Mortgage lending purposes
• Tax assessments and appeals of assessments
• Negotiation between buyers and sellers
• Government acquisition of private property for public use
• Business mergers or dissolutions
• Lease negotiations

The opinion of value is typically based on the sales comparison approach, which is where the appraiser analyzes sold properties that are geographically and physically similar to the property they are appraising. The appraiser can also value the property based on cost approach and income approach, but these are used much less used for single family homes.

The process makes sense because typically buyers are looking in a certain area and analyzing several homes on the market. They are seeing which home they like the best and what price they want to offer. The appraiser is essentially doing the same thing, but analyzing every aspect and adjusting for it. Most of the time the process if accurate. However, it is based on the quality of the sales data and the information available. If the information is not great, then the appraisal will be less credible.

I get asked all the time, “Is Zillow accurate”. Or “Zillow says my property is worth $XXX,XXX.” The truth is Zillow has a great product, but it many times cannot account for information that is now known. Zillow most likely doesn’t know the level of quality or upgrades on the interior. The interior is one of the major components of a home. Completely renovated homes can sell for hundreds of thousands more than unrenovated homes. Hence, why there are so many fix and flippers out there today. So, my experience has been that Zillow is a great starting point, but appraisers dig into the details more. That being said, I am sure there will come a day where technology will replace a large majority of appraisers.

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“Should I get an appraisal before I make an offer to purchase a home?”

The majority of buyers in the US market get a mortgage when they are purchasing the home and in most of these cases a home appraisal is ordered by the bank to ensure the home’s value is at least as much as the buyer is offering to pay. The bank wants to make sure their investment is secure. The appraiser is hired by the bank and the buyer is provided a copy. However, some appraisers appraise a home at the contract price or it greatly influences the appraisal. Usually, the home is listed in the MLS and exposed to the open market. Many people look at the home and it goes under contract at a price that is both agreeable to the buyer and seller. This provides a data point, but it does not mean that is what the subject’s value is. A buyer may be willing to pay more than it is worth if they really love the home or if they are not educated about the market. The seller may be willing to sell for less than the market value because they really need to move, they have another house waiting for them, or they need to get rid of the financial obligation. So, the contract is a data point, but it the subject should not be appraised at the contract price for that reason alone.

So, back to the question – Should you get an independent appraisal?

My advice would be that you probably do not need a separate appraisal in most cases. If a buyer has a real estate agent, the agent should be able to educate the buyer regarding sales in the neighborhood. If the agent is not able to do this, then yes, it would be a good idea to get an independent appraisal. Another scenario where an independent appraisal may be helpful is when the subject property is unique and/or there are very few similar homes that have sold recently. This would take in depth analysis that goes beyond what is typical and an experience appraiser may be able to do this for you.

Final thoughts

For most, a home is one of the largest purchases, so it would make sense to determine what a fair market value is. It is for the particular buyer to determine whether they are satisfied with the knowledge they have or were provided with.

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 “What do I need to do before I have an appraisal done?”

The truth is, you don’t need to do anything, BUT it helps to do a few things so that the process is smooth and you maximize the value of your home.

Banks do not want any safety or health hazards in the home. This throws up a red flag and typically will have the appraiser come back to inspect the problem area. It is best to address these items before. Some of the common items I see that could be considered a safety hazard:

• Exposed wiring
• Missing handrails on staircases
• Peeling paint – If the home is built before 1978 – possibly lead based
• Damp areas and/or leaks
• Illegal stoves in basements or attics
• Bars on bedroom windows without quick release mechanisms
• Smoke and carbon monoxide detectors

There are many others, but these are some that I see the most in the New York area. In addition, if it is an FHA loan, they requiring testing of many of the items in the home including faucets, stoves, dishwashers, light switches, electrical outlets, toilets, heating system, AC system. A conventional loan that is not FHA, does not typically require testing of these items.

The next area of concern to address before an appraisal is appearance. I try to imagine every house is clean when I am appraising it. That is not so say I imagine the paint, flooring, and other items are in good condition, but that clothes are picked up and the home has been cleaned recently. Typically, when it is up for sale in the MLS, the homes are clean and this is why I do this. It is best not to rely on the appraiser to do this, but for the homeowner to make the home clean.

In order to make the appraiser’s job easier, it is nice to have a list of improvements done over the years and when they occurred. The appraiser should ask these questions, but this makes if very easy for them to know exactly what was done and verify it as they walk through the home.

Each appraiser does the inspection differently. I typically measure and inspect the exterior first so that I have all the main floor measurements going into the home. This makes measuring the 2nd, 3rd floor, and/or basement much easier. After the exterior, it is time to go in. I walk each level taking notes and photos along the way. The photos are required for most banks and they help appraisers remember exactly what was in each room. A picture is worth a thousand words… Once the interior inspection is done, I drive around the neighborhood looking as recent sales and then it is back to the office to do the report.

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