A few weeks ago I enjoyed lunch with one of my favoriteRealtors. During our conversation, she told me about a home sale she recentlyclosed in an upscale neighborhood for thousands of dollars above any previoussale price in that area.
As I drove home from our lunch, I couldn’t help but think,”I wonder how that house appraised for a much higher sales price than anyrecent comparable home sales price in the vicinity?” I sure wouldn’t wantto be the appraiser who got that assignment.
Purchase Bob Bruss reports online.
When a home buyer makes a small or zero down payment, theappraisal is vital to obtaining a high loan-to-value ratio mortgage. However,if a home buyer makes a large down payment, then the appraised valuation toconfirm the sales price is not so critical.
WHAT IS AN APPRAISAL? A state-licensed appraiser makesprofessional real estate appraisals. Any other evaluation, such as a real estateagent’s estimate of market value, is not an appraisal, but rather an opinion ofmarket value.
An appraisal of real estate market value is an estimate by atrained appraiser of the most likely price at which a property will changeownership, with neither the buyer nor seller being under pressure to buy orsell.
But the real world is much different. There are differenttypes of appraisals, such as a “quick sale value,” “as-iscondition,” “future renovated valuation,” and others. The skilland experience of the licensed appraiser play a key role in the accuracy of theappraisal.
Until there is an actual property sale, an appraisal is justan estimate of probable market value. However, even when there is a sale, thebuyer might have overpaid or a desperate seller might have accepted abelow-market purchase offer.
IS APPRAISAL AN ART OR A SCIENCE? Duringthe last 10 years, there have been many attempts to make real estate appraisalsmore accurate, especially with automated valuation models (AVMs). Mortgage lenderswould be thrilled to be able to verify the exact market value of a house bypressing a few buttons on a computer. Although that day might be coming, it hasnot yet arrived.
The latest attempt to eliminate the need for appraisers isthe free Web site www.Zillow.com, whichclaims to have 60 million U.S. homes profiled. For several of my properties Ichecked, I found the results amazingly accurate. I especially like the aerialviews with the lot boundaries superimposed.
Then I checked the house where I grew up in Edina, Minn.Zillow reports a one-bedroom, one-bathroom house worth $1.2 million. That housedescription sounds like a shack. If the valuation is correct, I wish my parentshadn’t sold that house. The reality is it is a very nice three-bedroom,two-bathroom house. Zillow isn’t always correct.
However, when houses and condos are relatively similar tonearby houses, AVMs can be very valuable to help estimate market values. Butappraisers will always be needed to verify valuations, especially inneighborhoods of unique one-of-a-kind homes.
Although computers have changed real estate appraisals,there is no substitute for the experience of a realty appraiser to interpretthe recent sales prices of comparable nearby houses and condos, which determinethe market value of a specific home. Equally important, an expert appraiser isneeded to evaluate if the local home sales prices are rising, falling, or”normal.” So far, computers haven’t been able to replace this judgmenttest.
HOW TO GET AN ACCURATE APPRAISAL OF YOUR HOUSE OR CONDO. TheInternet can be used to research approximate market values of houses andcondos, based on recent sales prices of similar neighborhood homes within thelast six months.
But that is just a starting point because each residence isunique. Market value depends on many variables. However, there are still a fewbasic rules to assure an accurate appraisal:
1.) GET THE HOME INTO TIP-TOP CONDITION. If youare buying a house or condo, the seller has presumably made the residence lookits best. However, if you own the home and need an appraisal for mortgagerefinancing or other purpose, aim to put the home into its best “modelhome” condition before the appraiser arrives.
Because appraisers often inspect three or more houses eachday, and can’t possibly remember each home’s special features, it is best tohand the appraiser a list of the residence’s special features, especially thosethat add market value. Also, if you know of recent nearby home sales prices, besure to hand that information to the appraiser.
A Realtor friend of mine, who never has problems getting anappraisal to match the home’s sales price, tells me, “I practically do theentire appraisal to be sure the house appraises for the sales price.”
2.) ALWAYS ACCOMPANY THE APPRAISER. Eitherthe real estate agent or the homeowner should always accompany the appraiser tofacilitate the inspection and answer the appraiser’s questions. Be sure topoint out the home’s special features and benefits that the appraiser mightmiss during the inspection.
3.) INSIST THE LENDER WILL PROMPTLY PROVIDE THE BORROWERWITH A COPY OF THE APPRAISAL. Technically, the appraisalbelongs to the mortgage lender who hired the appraiser, even when the homeowneror home buyer is paying for the appraisal.
Borrowers should insist their lender agrees to promptlyprovide the borrower with a copy of the appraisal. If the appraisal comes inlow, the home buyer, realty agent, and homeowner should have immediate accessto that appraisal to correct any errors.
For example, when I refinanced my home last year with WellsFargo Mortgage, I was very impressed when the lender sent me an overnight FedExcopy of the appraisal.
If the appraisal comes in low, and you see the appraisermade an error evaluating your house or condo, don’t hesitate to promptlyrequest a correction or a “review appraisal” by another appraiser (tobe paid for by the lender).
CONCLUSION: Although appraisal is still verymuch an art, rather than an exact science, computers continue to help makeresidence value estimates more accurate. However, licensed appraisers willalways be needed to verify the facts and use them to arrive at expertvaluations. More details are in my new special report, “How to Get theBest Appraisal of Your House or Condo,” available for $5 from RobertBruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736or instant Internet delivery at www.BobBruss.com.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2006 Inman News