How much is your home worth? How much more would it be worth if you remodeled the kitchen or enlarged the master bedroom? How do you know what price to set when you put it on the market, so it’s neither over nor undervalued? Is that condo you’re thinking of buying worth the $8,000 more it’s listed for than the one downstairs? These are questions REALTORS® can advise on, but appraisers can determine.
Working With An Appraiser
The REALTOR® is front and center during any real estate transaction. The loan officer at the bank will become familiar too. Buyers and sellers will need them both. But what does an appraiser do, and when and how? Simply put, the appraiser is hired by the lending institution to ensure that the home is worth what the seller is asking.
“The more someone puts down, the less the lender is concerned about the price, because the buyer has so much of their own equity in the property,” says Michael Guthrie, CEO and Principal Broker of Wheeler Realty. “But if you have a buyer who has very little money down—there are some loans out there that are 100% financing—then the appraisal becomes very important because you have to make sure that that property is the right value, so that if for some reason something happens and the buyer needs to sell that house, they can sell it and be able to pay off their loan.”
“The usual time an appraiser is called in is once a buyer writes a contract on a property,” Guthrie says. “Once buyer and seller agree to terms, including a price, then the lender will order an appraisal, which the purchaser will pay for. Then the appraiser goes out and determines if the house will appraise at the price that the buyer is willing to pay—they’re looking to protect their loan.”
Here’s how they do it. First the appraiser inspects the entire building inside and outside, noting the quality of the original building materials and how well they have been kept up. Besides looking at the physical property itself, the appraiser inquires about any repairs and upgrades, and researches its ownership, sales and listing history.
By and large, this is an objective process; every appraiser is required to follow strict guidelines (more about those later). Still, they’re only human. “It’s really important when an appraiser comes to your home to make it look as good as possible,” Guthrie says. “The first thing the appraiser’s looking for is upkeep. Does the front door area need sanding and painting? Perception is everything. If the house is neat as a pin and everything’s in place and it’s not cluttered, and the normal areas that people are coming through are painted, that shows that the house has been well-kept. All of those things help in getting the best appraised value for the house.”
“Make sure the appraiser can access all the rooms,” Loring Woodriff REALTOR® Inessa Telefus says. “Have a list of upgrades, a list of special features of the house and location. Make sure the appraiser knows about any new stores, parks, etc. in the area.” These neighborhood amenities and conveniences will factor into the appraiser’s determination of the home’s value.
“As a listing agent, I make sure appraisers get to see the entire property and that they know of all improvements,” Telefus says. “I also make sure they are familiar with all the comparables.” The “comparables” she’s referring to are comparable properties—neighborhood homes of similar size, design, age and condition which have recently been sold. An appraiser will want to know how the property on the market stacks up with these recently available properties.
“You’re going to want to use the comparables to provide them information that may be helpful in the appraisal process,” Guthrie says—“here are the three comparables that we used to determine why we value this house at this amount—just to make sure the appraiser is looking at the same things that we’ve looked at. From the REALTOR’S® standpoint, it’s a responsibility of ours to make sure that information is there.”
“There are a number of factors that appraisers look at when determining overall comparability,” says Troy Johnson, owner of Absolute Appraisals. “The first thing to understand is that we are looking at homes in that particular neighborhood that have sold in the recent past. Sometimes homeowners look at comparables that appraisers select, and say this isn’t comparable at all. But in reality, it’s all that’s available. Having said that, once we look at a pool of comparable sales, we’re looking for properties that are similar in terms of 1) location and, 2) physical characteristics items such as quality of construction, the condition of the house, the structural integrity of the home, the bedroom count, etc. The closest properties we can get to the subject property in terms of neighborhood and physical characteristics are the comps we’re going to use.”
In some cases, a home’s rental potential is another factor an appraiser considers in determining a home’s market value. This is especially the case for homes which already have tenants, and homes in neighborhoods—for example those close to the University of Virginia—where rental demand is high. In such cases, Johnson says, “the income that that property generates is going to be one of the most important factors in terms of the value of that property.”
Before the Appraiser Comes: Improvements to Make, and Improvements Not to Make
“One of the most important things is to make sure there is no obvious deferred maintenance, especially if you’re using an FHA or USDA loan,” Johnson says. “Those particular loans have very stringent deferred maintenance standards, and if there is any deferred maintenance, in order for that loan to process, you’re going to have to go back and fix it. Secondly, improvements to the kitchen, bathroom and main living areas make quite a difference, but people can also over-improve as well. You’re not necessarily going to get all your money back if you’re going overboard and overpricing or super improving the property. You won’t get your return. But if you improve those key areas within a reasonable range, then you’re typically going to get your investment back or more.”
What you want to be careful not to do, Johnson says, is improve the property above and beyond what the marketplace is willing to support. “For example, somebody decides to renovate their kitchen and go to France to get the most incredible, one-of-a kind gas stove that costs $50,000, and they decide to hire a company to build custom cabinets and a custom-size fridge. A typical buyer wouldn’t come in and say I’m willing to pay what you paid for that. So it gets lost in translation.”
For the average middle class home, that is. “When you get into really high end homes,” Johnson notes, “those qualitative factors become the most important factors outside of location. Factors such as quality of construction and condition are what really set these homes apart from the next; with multi-million dollar homes, people pay a lot of money for an incremental increase in quality of construction, and that increase can cause major price swings.”
Is it a good idea for a homeowner to call an appraiser when she’s thinking of upgrading? “Yes,” Telefus says. “If the home owner is increasing the square footage of their home, they can get some tax breaks through the City of Charlottesville.” Additional square footage, especially if it’s aboveground, can be a good investment. While a finished basement will add some value, appraisers are required to consider only aboveground space when listing a home’s gross living area.“The time and place when you could have an appraisal is if it’s a unique house or in a unique area,” Guthrie says. In those cases, “sometimes folks will do what’s called a pre-listing appraisal. They’ll have an appraiser come in and do an appraisal on the property without having a contract on the house already. Then they take the appraisal and what the REALTOR® has put together in regards to what they think the value is, and they compare the two, and come up with what they think is a fair market value for that property.” Guthrie advises homeowners looking for an appraiser to consult a REALTOR®.
Environmentally friendly building and rehabbing have gone mainstream in recent years. They’re good for the planet, and good for the conscience. But when you’re putting your home on the market, are they good for the pocketbook too? Increasingly they are, Guthrie says.
“An energy-efficient home with a green certification means a great deal to people,” Guthrie believes. “It used to be just for salability—that someone says this is the kind of house I want to live in. But now an appraiser can see the different energy-efficient systems that have been put in the property, and they now have a way of adding value to those, whereas three years ago they didn’t.”
In the great majority of cases, Fannie Mae (The Federal National Mortgage Association) requires appraisers to use a standardized form known as a 104. Recent changes to that form now guarantee much more uniformity—and therefore fairness—in the way it’s filled out.
“The guidelines for appraisers have changed in the last several years to make it an objective versus a subjective process,” Guthrie says. “There used to be some real pressure, where the REALTOR® and the lender were able to say ‘this is the appraiser we want.’ Or we knew who the appraiser was and some people used that to their advantage by saying ‘if you don’t give us the number that we need, we’re not going to want to use you again. That put unfair pressure on the appraiser. Now there is a pool of appraisers that the lender chooses from, but the loan officer—the person helping the buyer with a loan—and the REALTOR® are not to be in conversation with those folks, so they can do an objective evaluation of the property.”
“It’s important to understand that an appraisal is an opinion of market value and it’s independent of what a homeowner or REALTOR® feels the house is worth,” Johnson says. “The appraiser is an independent party. He doesn’t have an agenda. The burden of proof rests on him to prove to the bank his opinion of the market value on this property. Oftentimes a homeowner or REALTOR® will strongly disagree with our opinion, and that’s OK. But the appraisers are here to tell people what they need to know, not what they want to know.”