Understanding the appraisal process
When a home is listed for sale, the seller and the real estate agent work together to put a reasonable price on the home.
That price can be based on the agent’s market assessment, the seller’s costs or loan amount or even simply the amount the seller hopes to make on the sale of the property. Buyers, however, have the option to agreeing to the amount or offering a lower or higher amount.
In today’s buyers’ market, most buyers don’t offer more than the asking price. In the some sellers’ markets, it’s not uncommon, particularly during a real estate boom time.
If the seller is getting financing from a mortgage company or financial institution, the financial company requires an appraisal of the property to make sure the property is worth the amount of money it is loaning for the purchase. Likewise, when a homeowner is refinancing, an appraisal is required for the same reason.
After the housing collapse in 2008, there were suspicions in some markets that appraisers were inflating values at the request of builders, real estate agents, sellers or anyone else who had a stake in a higher property valuation, which fed the real estate boom — and precipitated the housing bust. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, an additional objective third-party was created to serve as the liaison between appraisers and those who are seeking the appraisal. Financial institutions are now required to request an appraisal from an appraisal management company, which then contacts the appraiser directly.
“It added some necessary protection,” said Allen Coombs, mortgage loan originator with Major Mortgage. “We don’t even know who the appraiser is until we get it in writing.”
Real estate agents are also removed from the process, not knowing who is appraising the home until they get a copy of the appraisal form.
Occasionally, an appraiser might contact a Realtor to find out which homes were used for comparables when the agent established a price for the house.
The extra layer of the appraisal management companies also added to the cost of the appraisal, which is paid for by the buyer. The procedure is usually handled over the Internet, so there is no additional time required.
When an appraiser evaluates a home, he or she looks at it much like a buyer would and considers many of the same features. In real estate, the standard line is that the three most important factors in evaluating property are location, location and location. The same is true with appraisals.
Simply put, some areas are worth more than others. The same property at the base of the Colorado National Monument is worth more than if it were placed next to the railroad tracks on S. Seventh.
Appraisers also take the quality of the construction into consideration, whether the home was built using 2 X 4 or 2 X 6 construction, other types of materials used and the cost and life expectancy of certain products. A ceramic tile roof is valued more than an asphalt roof due to both the cost of the materials and the expected longevity of a tile roof.
The style and size of the home is also considered during the appraisal. According to Chris Brownlee with Brownlee Appraisal, there is a slight preference in the local market for single-story homes rather than multi-level.
Upgraded features and amenities can also add value to the home. A home with tile or natural stone in the bathroom will probably be appraised higher than one with a fiberglass surround shower. Built-in speakers and security systems can also add value. Hardwood flooring adds more value than carpet.
Energy Star certification is just beginning to show up on the MLS information sheets and on appraisals. Energy Star homes often have costlier materials or construction techniques and are rated for performance by a third party. When a home’s rating certificate is available for the appraiser to consider, it can have an impact on the appraisal, since it may be the only visible proof of Energy Star upgrades that are hidden behind sheet rock or in crawl spaces.
Homeowners who purchase an Energy Star-rated home should keep their certification and have it available for appraisers and prospective buyers if they decide to sell their home at some point in the future.
Appraisers are required to fill out a market condition summary form, which looks at comparable sales in the same area in three different time frames: sale prices in the last zero to three months, those in the last four to six months and those in the last seven to 12 months. Fannie Mae and Freddie Mac require at least two of the most recent sales be used as comparables, which was a difficult requirement in some areas a year or two ago, when sales slowed significantly.
The market condition summary form also shows what percentage of homes in the area have been sold as foreclosures.
“In one area, over 90 percent of our sales were foreclosures,” said Brownlee. “It had a huge impact. Those foreclosed homes became the homes that set the value.”
There is good news, however, as the local real estate market seems to be settling down.
“In most areas, we’re seeing fewer active listings that are foreclosures,” Brownlee said. “That was not the case 12 months ago.”
Around the valley, Realtors have said that there aren’t enough good quality homes available in the inventory. Appraisers agree.
“We’re not seeing that over-supply of active listings compared to the number of sold properties,” Brownlee confirmed. “The supply is not what it was.”
Likewise, homes in the lower and mid-price range are not staying on the market for six months to a year. Those that are priced right are selling in a few months and sometimes in a few weeks.
The best news, at least for sellers, is that prices are no longer dropping every month across the valley.
“We’re seeing more areas that appear to be stable,” said Brownlee, who said the medium sales price in Fruita, especially, has been very stable over the last year. Brownlee has also seen a few areas where prices have increased and a few areas where prices continue to decrease.
The key to selling a home in today’s market is pricing it correctly. To make sure your home doesn’t buck the trend and stay on the market for six months, choose your real estate agent wisely and trust his or her judgment.