Determining a home’s value is key to a successful listing and sale. Sellers who insist on over pricing their home will find that when it doesn’t compare favorably with others in the same price range buyers won’t make an offer. Meanwhile, buyers looking at lower priced homes who may be good prospects won’t see it at all. For homes that are reasonably priced, the negotiation between buyers and sellers with the advice of their agents will ultimately determine their market value. However, before all parties can go to closing, there is another critical step.
While the ultimate price on the sales contract reflects what the buyer is willing to pay for the home and what the seller will accept, the mortgage company will nevertheless require a report from a professional appraiser. Since appraisers have no stake in whether the home actually goes to closing, they are the most objective party in the transaction, and their objectivity is further enhanced by the requirement to rigorously follow the mortgage company’s guidelines.
When the appraisal report is complete, the mortgage company determines the amount it is willing to lend based on the terms and conditions of the loan package. This can range from 100 percent financing (still an option though it is much more rare than it once was) to a pre-determined percentage of the appraised value of the home. If the appraisal comes in under the price on the sales contract, the buyer either has to make up the difference out of pocket or has the option to pull out of the contract, not an agreeable outcome for any of the parties involved.
A home’s appraised values reflects a range of variables such as the quality of the local school district, distance to amenities like shopping and other services, condition of the home and landscaping, its age and whether or not it has been renovated, the age of the heat pump or the roof and the color of the walls or carpet. The value and condition of other homes in the neighborhood are also big factors in determining the value of a particular house. While sellers are not able to control many of these variables, they can become familiar with the process and take steps to assure their home gets the best possible appraisal report.
How Appraisers Work
An appraiser works from a fixed formula, explained Jim Kennedy with Kennedy & Associates and they must follow guidelines laid down by the mortgage company that engages them. For example, when determining the gross living area of a home the appraiser can only consider rooms that are above grade. That means if there are two 1,000 square foot ranchers in the same neighborhood, but one has a finished 1,000 square foot basement, they would still both have the same gross living area for appraisal purposes. This doesn’t mean that the finished basement doesn’t add value to a home, but it is not on par with the upstairs.
In addition to counting bedrooms, bathrooms and square footage, the appraiser will walk through the home and note the materials used for floors walls and countertops. They will also consider the condition of the home, Kennedy said, as well as any history of repairs. This means if you have done repairs over the years, for example replaced the roof or the HVAC, added new windows or updated your kitchen or bath, be sure to provide the appraiser with any records so the improvements can be taken into consideration when the appraiser is preparing his or her final report.
Comparables Are Critical
When determining the value of a home it is essential to consider the competition, said Troy Johnson with Absolute Appraisals. It is not uncommon, he continued, for homeowners to keep track of every improvement and the costs incurred. When they are ready to sell, they want to add this figure to what they paid for the house in determining what they think it should be worth.
Unfortunately this is a cost approach to value that fails to consider that a home’s price is always relative to what similar homes have sold for in the same community, Johnson said. So, for example, it’s great if you just replaced your roof, but unless most of the other homes that sold had leaky roofs, what you have done with your repair is bring your home up to standard with the others in the neighborhood. This means its sales price will reflect what the others in your area sold for regardless of what you paid the roofer.
Home valuations based on tax records can also give misleading results, Kennedy said. He explained that tax records often don’t reflect improvements or additions to a home and the square footage may be way off. As a result, estimates of your home’s value that uses these records may give a general idea of what it’s worth, but chances are will not be very accurate.
Trends in real estate are also a factor in determining your home’s value. Today people are gravitating to homes with big kitchens and open floor plans, Johnson said. Also one level living is also very popular. If your home is a conventional two story with all the bedrooms upstairs, its market price may be less than one next door with a first floor master suite, even if both homes have been well-maintained and have the same square footage.
If you are thinking about selling your home and are considering some spruce ups, focus on the kitchen and the bath, Johnson said. Natural stone countertops “go a long way” towards making your home more appealing in today’s market. These would include granite, soapstone, or even concrete if your home and your tastes are very contemporary.
Kennedy agreed with the importance of kitchens and baths if you are looking for ways to make your home more appealing. He suggests upgrading your appliances to ones that have a more up to date look and function.
Upgrading carpet and paint colors to reflect current trends can also be low cost ways to bring your home up to standard with today’s market, Johnson explained. You may not see an actual return on dollars spent in terms of a higher sales price, but these updates will make your house more competitive which can mean a quicker sale. Since more days on the market are costly, you can actually save money by doing the right cosmetic repairs.
Before you make any final decisions about upgrades, invite your REALTOR® over to walk through your house and give you suggestions. They are very familiar with your competition and can give good advice on what will be the most cost effective ways to get your home ready for sale.
Cost Versus Value
If you are planning some renovations and want to know if they will add to the value of your home when it goes on the market, there is another source of helpful information.
Every year Remodeling Magazine publishes the Cost vs. Value Report that is available at their website.
The report considers 35 common remodeling projects and compares their costs with what REALTORS® and brokers estimate they will add to the price of the home when it sells. This year 4,500 REALTORS® from around the country participated in the survey, and each region was represented by selected cities, the closest to us being Richmond.
The good news is that as the housing market improves, so do the values of different remodeling projects. This year’s report shows that the number of dollars recouped on remodeling projects increased for the second year in a row, and while national trends were reflected in regional data, there were some interesting local variations.
For example, the top project nationally was installation of a new steel entry door, which recouped 96.6 percent of its cost at closing. This renovation no doubt reflects the continuing importance of curb appeal in today’s market. While homeowners in our area can expect an even higher return on this project (100.3 percent) a bathroom remodel that returns 110 percent is an even better investment. Nationally the bathroom remodel returned only 72.5 percent.
Some other beneficial investments reflect either concern for curb appeal, energy conservation or both. These include garage door replacement, which returned 100 percent in Richmond, and vinyl, and wood window replacement at 99.2 and 96.7 percent respectively. These were substantially higher returns than nationally where both came in at less than 80 percent. Fiber cement siding replacement is also a good choice returning 94.2 percent.
If you could use more living space in your home, you might want to consider adding an attic bedroom (89.6 percent) or undertaking a basement remodel (86.5 percent).
Do Green Features Help Sell Your Home
Will you get a higher price for your home if you invest in energy savings? While research elsewhere in the country suggests the answer is yes, local appraisers say this can be a difficult question.
A 2012 article in the Washington Post reported on a study conducted in California, which was based on 1.6 million homes sold between 2007 and 2012. Results showed buyers were willing to pay an average of 9 percent more for a home that was green certified. This result held even after controlling for other variables such as location, school district, crime rates or the home’s amenities.
When it comes to Charlottesville “the verdict is still out,” Johnson said. He explained that to include the value of green in a report he has to be able to prove the difference with hard figures based on analysis of the data. Unfortunately it is often difficult to find an impact on price.
“We don’t have a big enough volume of sales,” Kennedy said, suggesting it may take a few years with the growing volume of green homes on the market to really say for sure.
“Green features can make your home more competitive,” Johnson said adding that this means your home may sell more quickly than one which is lacks these upgrades. “We won’t know until we have more data,” he said.
Depending on how long you are planning to stay in your home it may be worthwhile to undertake green renovations since you will enjoy energy savings, greater comfort, and possible tax credits in the meantime. Keep good before and after records. That way when your house does go on the market you can show prospective buyers the savings they can expect.
What is Your Home Really Worth?
Valuing your home is both an art and a science. While the market price reflects buyer and seller preferences, this must be backed up by the appraiser’s best estimate of the true value. If you are ready to put your home on the market, consult your REALTOR® about how best to prepare it for an effortless sale.
Celeste Smucker is a writer, blogger and author who lives near Charlottesville.