Myths About Real Estate Appraisals
October 31, 2018
Northwest Real Estate Services
If you are a real estate agent, understanding the basics and nuances of appraisals will help you close more transactions with very few “blips” along the way. And if you’re a consumer who owns real estate, you may encounter the appraisal process as a part of obtaining a mortgage. Having a good understanding of the process will help you be an informed agent or consumer.
AN APPRAISAL IS JUST LIKE A CMA
A Competitive Market Analysis is a real estate agent’s tool to estimate market value of a property they hope to list. It’s also useful for advising a buyer on an offer price. The level of detail varies, but they typically involve research into similar sales in the neighborhood by comparing them to the home they’re dealing with. Many CMA’s are computer programs that pull MLS data into a comparison chart, which looks similar to an appraisal “grid” that provides a similar function.
HOW IS AN APPRAISAL DIFFERENT FROM A CMA?
First, it’s in the level of detail. Residential appraisals, if the forms are used for lending purposes, are typically a minimum of 20-40 pages. They include detailed descriptions of the property being appraised, along with details on the comparable sales being used for the comparison process. The comparison is accomplished through a line-by-line analysis of features and amenities, with dollar adjustments made for market reaction to the feature/amenity. In addition, there may also be an income approach used for income properties (any leased property); and may also include the cost approach for newer ones.
Second, appraisers are required by their ethical guidelines to render opinions of value that are completely independent. There can be no advocacy towards a desired end, no “pushing a value” to impress a seller or suggesting a low one to convince a buyer to offer. Real estate agents are engaged by their buyers and sellers to advocate for their cause, while appraisers are required to be “the independent voice.”
IT’S EASY TO BECOME AN APPRAISER
The appraisal profession has become a different beast than it was in the 1920’s and 1930’s, when most appraisers were real estate agents working for bankers, or the bankers themselves. Decades later, appraisal became its own profession as educational requirements were developed that were no longer the same as those required of a real estate agent. The market recognized that there was a need for objective evaluation services.
A COMPUTER DOES ALL THE WORK
It’s true that the appraisal profession has drastically changed over the years, with greater and greater reliance on computer programs and data. It was as recent as the late 80’s when research took an appraiser to a courthouse to do research for every report, and typing was done on a typewriter. When the use of computers became common, software programs were designed specifically for appraisal use. And with public records going digital, they became readily available to be utilized by appraisers from anywhere. In today’s world, appraisers have access to an endless stream of programs to assist them in their comparative analysis.
However, even with access to data at their fingertips, there is still a need for the human touch in the analytical process. Despite the temptation to replace appraisers with computer analyses, the appraiser still has an active role in this process.
APPRAISERS CAN SHARE INFORMATION WITH AGENTS, INCLUDING THE APPRAISED VALUE
The Uniform Standards of Professional Appraisal Practice (USPAP) spell out guidelines and standards for appraisers on a national basis. Its Confidentiality Rule limits the sharing of appraisal opinions to the appraiser’s client, and real estate agents are not the client in a sale transaction involving financing. Only with permission of the client can an appraiser share assignment results with anyone else, including the real estate agent.
APPRAISERS CAN SHARE INFORMATION WITH BORROWERS, WHEN THE BORROWER PAYS FOR THE APPRAISAL
USPAP indicates that paying for an appraisal does not bring with it the right to assignment results. Once again, only the client has the right to that information. This can be frustrating to a borrower in a refinance scenario, where they argue that, “I paid for the appraisal!” The Confidentiality Rule does not address who paid for the appraisal.
IMPROVEMENTS MADE TO A HOME INCREASE THE VALUE DOLLAR-FOR-DOLLAR
You upgrade to your dream kitchen, replace all the windows, or add on a family room. Imagine your shock when you compare “before and after” appraisal values, and you didn’t get all that money back in value. How can that be?
Here’s why: the value return you will get depends on the response of the market to the project. Historically, a dollar-for-dollar return does not occur on maintenance items, such as furnace or roof replacement. Upgrades such as kitchen and bath remodels, or room additions, may contribute to value but may not increase the appraisal value by the entire amount. Markets vary, and demand for features like pools or buildings will, as well.
It’s easy to be fooled into thinking that appraisers provide the same services as a real estate agent in estimating value. The appraisal profession, requiring the appraiser to be “independent, objective, without bias” and confidentiality with their client provides a different model for valuation. Let’s dispel some of these common myths, with a greater understanding of how appraisals work.