All About Appraisals
Are Appraisals The One True Value?
Are appraisals the one “true” value? What is an appraisal? Do I need one as a buyer? These are all great questions! Appraisals have often caused confusion for many inside and outside of the industry… what they are and what they are not.
What is an Appraisal?
Most of us have heard of an appraisal if we have been in the buyer / borrower seat. In technical terms, the lender wants to make sure they are borrowing an appropriate amount for the home, so if you don’t make a payment on the home, they can sell the home to recoup their losses.
Essentially, the appraisal is a third party opinion of the value of a home by a state licensed appraiser (often an unbiased opinion), which is almost always required by a lender / mortgage provider to obtain a loan. The appraisal itself often requires an appraiser visiting the subject property to take pictures of it’s condition, note the basic property attributes - number of bedrooms, bathrooms, etc. and then use various sources (including the MLS) to compile a report of comparable properties currently on the market, pending, and recently sold. They use a number of formulas / methods to determine the “appraised value”. Depending on the loan program requirements, an appraiser may also looks for code violations that may shorten the life of the home or safety hazards like missing deck railing, hand railing, electrical fire hazards, etc. Some programs are more stringent than others.Talk to your trusted lender to discuss the pros and cons of different loan programs, to determine what is best for you.
From here, the appraiser compiles all of the information into what is called an appraisal report. Now, is that appraisal value considered the “one true value”? It depends! In the bank's eyes, yet! They are basing the value of the home and loan consideration on that appraisal value stated in the report, but, like many things in real estate, the value to one individual may differ from another. Which leads us to the next question...
Is Paying Over Appraisal Value Common?
Paying slightly over an appraised value is commonly seen in a competitive market, as we are currently experiencing. At the end of the day, that “appraised value” will continue to evolve and change as the market conditions change. The value and true test is knowing what your goals are in owning the desired property and determining what you’re willing to pay for it. That looks very different for different individuals, and that is one aspect that drives competition in the industry.
How Long Is An Appraisal Accurate?
Let’s say you get the home of your dreams and have owned it for many years now, but are now considering selling. How long is that appraisal value accurate? An appraisal value is not a “timeless value” because it factors in comparable property sales (which change during different market conditions). For example, let’s take an appraisal report from 10 years ago on a property that has remained in the same condition with no major improvements. That appraisal may seem “accurate” because it still possesses the same basic property attributes (3 bedrooms, 2 bathrooms, 2-car garage) and all of the comparable properties are comparable regarding those attributes. However, let’s say the market conditions have drastically changed from a seller’s market with low inventory to a buyer’s market with high inventory. That market shift will greatly affect the “value” in the new marketplace.
Take another example, a home that used to be a 3 bedroom, 2 bath, is now converted to a 2 bedroom, 2 bath with a large sunroom (instead of the 3rd bedroom)... Will that have an effect on the appraisal value? Most likely yes! Will it have an effect on the salability of the property? It depends! If the sunroom could easily still be used as a bedroom, a potential buyer may be able to look past the “2 bedrooms”, knowing they plan to use the space as a guest bedroom, but the appraised value may reflect that difference. In either case, the appraisal value in a report is helpful and important especially at the time of securing the loan and verifying the value for the bank, but an appraisal from years past may not be the ‘timeless value’ many hope for.
All in all, it’s important to understand the appraisal, it’s intended use in the loan and financing process when buying a home and taking that context into consideration for years ahead. If you’re curious what your home is worth and have an older appraisal report, we recommend getting a marketing analysis from a trusted Real Estate Agent in your area, to understand the current market conditions that may affect your home’s value and selling price.