How an Appraiser Determines Market Value

There is a saying in real estate that a home is only worth what someone will pay for it.  However, if a buyer is using a lender to finance the purchase, the sales price will also be subject to an appraisal completed by a residential real estate appraiser.  When determining the market value of your home, we will need to first consider what price will attract buyers and second, we will need to determine what price an appraiser will value your home.

What is an appraisal?  A Real Estate Appraisal is a methodical process of developing an opinion of value for real property.  An appraiser comes out to your property and does a walk thru.  For lending purposes, appraisers are required to abide by guidelines as set by the appropriate agency (Fannie Mae, Freddie Mac, FHA) for the mortgage the buyer is applying for.

What does an appraiser look for?  An appraiser will first look for homes that are comparable to yours in the same subdivision that have sold in the last 3 months.  If not enough properties are found, the appraiser will expand the search to include properties that have sold in the last 6 months.  If there are still not enough comparable homes to determine the value, the appraiser will expand outside of your subdivision or community.  An appraiser will also look at comparable homes currently on the market to determine where the overall value of the homes are headed (up or down in value).

It’s important to remember two rules regarding the valuation of Residential Real Property.

Rule #1:  Price per square foot is the WORSE possible way to measure value.  An appraiser rarely uses the price per square foot when determining their opinion of value.  This method does not take into account upgrades, condition or many other items that affect the value of a property.

Rule #2:  Don’t compare apples to oranges.  Appraisers make “adjustments” to the value of your home based on the sold comparable properties.  Let’s say your house is an apple.  You cannot take an orange and make adjustments to that orange in an attempt to create an apple.  When determining the value of a property it is important to find other apples to compare your property to.

Example of comparing apples to oranges:

A single level 3 bedroom, 2 bathroom, 2 car garage at 1800 SQFT cannot be compared to a two story, 4 bedroom, 2.5 bathroom, 3 car garage at 2400 SQFT.    This is not acceptable practice for any of the lending agencies (Fannie Mae, Freddie Mac, FHA).  The apple must be compared to other apples.  Fannie Mae, Freddie Mac and FHA have established appraisal guidelines that prohibits adjustments bigger than 10% of the value, reinforcing the idea of comparing apples to apples.  Conventional loans have different appraisal guidelines.  Talk to your lender about what type of financing you will be using and if there are any potential appraisal issues you need to know about.

Example of comparing apples to apples:

A single level 3 bedroom, 2 bathroom, 2 car garage at 1800 SQFT compared to a similar single level 3 bedroom, 2 bathroom house but with a pool or a 3rd car garage.  An appraiser can make adjustments for items such as pools, garage spaces, kitchen and bath renovations, flooring, solar energy (does not include leased solar equipment), or even the number of bedrooms.  The goal is to find comparable properties with the least amount of adjustments needed.

The adjustments that an appraiser makes can vary from appraiser to appraiser, but there is a general consensus of adjustment amounts that are being used in our market today.  For example, an adjustment for a pool or lack of pool is typically $8000 to $10,000 in the West Valley area and an adjustment for a 3rd car garage stall (not tandem) is typically $3000 to $6000.  It’s important to keep these items in mind when looking at comparable properties to determine your best list price.

If you have any questions about adjustments please contact me.  Looking for a Realtor to help sell your property?  I’d be honored to help you experience success with the sale of your home!


Posted on July 16, 2019 at 3:17 pm
Cinda Rose | Category: Selling Your Home | Tagged ,