How does the appraisal process work? Why isn't it just the price we agree to pay?

The oldest argument in the real estate book is "the value of a home should be what a reasonable seller and buyer agree to." They argument is mostly correct if it's a cash sale, but if a lender involved an appraisal will be required.

 How does a full appraisal really work? The appraisal process is a combination of science and opinion—but mostly science, even though the value that the appraiser delivers is called an “opinion of value” as of the effective date of the appraisal. It's very much the same process a listing agent will use to determine the best sales price in a comparative market analysis. 

Here’s how the process works: First, the appraiser describes the house being appraised (the "subject") in a standardized way: living space in square feet, lot size, view, location, amenities, condition, etc. Then, the appraiser lists at least three other similar properties (comparable sales, or "comps") that have sold recently, generally within six months. The comps should also be near the subject.

Next, the appraiser will describe the comps in the same standardized way he did the subject—except that he will use a combination of MLS data and public records. Then, he’ll apply dollar adjustments to make the comps the equivalent of the subject. If one of the comps is 200 square feet larger than the subject, for example, the appraiser will apply an adjustment based on the square footage. I’ll use $75 for this example. The appraiser would adjust the sales price of that comp downward by $15,000 (200 x $75). He’ll follow the same steps for other aspects of the property, such as condition, upgrades, pool or spa, view, etc. This will give an Adjusted Price for the comp. He’ll go through the same process for each of the comps.

Then, the appraiser will put the comps in order, starting with the one the most like the subject. Then, he'll calculate a weighted average of the comps to arrive at his "opinion of value." It's important to realize that only the properties that have sold will figure into the weighted average. Properties on the market will appear only to show the state of the market, not the price of properties. To complete the report, the appraiser will write a narrative report describing the condition of the property and in general explaining how he arrived at the opinion he did. He will also provide inside and exterior photos of the subject and its neighborhood, along with exterior photos of the comps. It's important to realize that a messy home will appraise for the same amount as it would in model home order. It's also important to keep in mind that ultra-premium carpeting and drapes are unlikely to make a significant difference on its appraised value—even though high finish decorating could ultimately bring a higher sales price.

One of the advantages of working with a broker that is a long term lender too is our experience with home valuation. For our take on any property, call 760.385.8660. 

 

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