“What do you think my property is worth?” This is the most frequent question I hear, as an Appraiser, when I inspect a person’s Subject property for an appraisal. There are several strategic mathematical calculations that an Appraiser must perform to receive an opinion of value.
What is an appraisal anyways?
According to the Uniform Standards of Professional Appraisal Practices (USPAP):
Appraisal: (noun) the act or process of an opinion of value; an opinion of value.
(adjective) of or pertaining to appraising and related functions such as appraisal practice or appraisal services.
Appraiser: one who is expected to perform valuation services competently and in a manner that is independent, impartial and objective.
Why do lenders need an appraisal? Lenders want to be certain that the property is worth the purchase price and can be sold to cover losses if you default on your mortgage loan. Sometimes, cash buyers get appraisals as well and you may wonder why? They are paying cash, correct? Smart cash buyers want to be sure what they are purchasing is worth the cash they are investing.
What about market value? What is market value? Sometimes people are confused on what market value actually is and where it is derived from.
According to Uniform Standards of Professional Appraisal Practices (USPAP):
Market Value: a type of value, stated as an opinion, that presumes the transfer of a property (i.e., a right of ownership or a bundle of such rights), as of a certain date, under specific conditions set forth in the value definition that is identified by the appraiser as applicable in an appraisal.
There are three main approaches that Appraisers use when determining market value. Cost Approach, Income Approach and Sales Comparison Approach.
Typically, Appraisers will utilize the Sales Comparison Approach on most residential properties. The Appraiser compares the Subject (the Subject is the property being analyzed for market value) property to other properties nearby with similar characteristics to determine the Subject’s overall market value.
So, why is that your next door neighbor’s house sold three years ago for 200,000 and your property appraised at 100,000?
There are a multitude of reasons that take play here. Appraisers generally search for sold comparable sales on the Multiple Listing Service (MLS) program, that are less than six months old, preferably less than 90 days old. Appraisers can also use closed settlement statements that are provided to them from the owner of the home, if the price was not disclosed on the MLS system. Please be aware, for sale by owner sold prices are not disclosed. Texas is a non-disclosure state, thus the Appraiser would have to have proof of the sold property, with the settlement statement as back up for their work file. There are instances, especially in rural towns, an Appraiser has to go back one year for sold properties. So for your neighbor’s house that sold three years ago, in most cases, the Appraiser would not search that far back. The reason Appraisers try not to go back that far for sold comparable sales is because it distorts the current market perspective.
Appraisers do not go off the most over generalized “price per square foot” way to derive a market value. Actually when someone says to me, “well the price per square foot”, my brain literally starts going in a tornado. Price per square foot?!! Pricing a property per square foot overgeneralizes the Subject and takes away it’s unique characteristics
The Appraiser analyzes the quality of construction and condition of the Subject when they inspect the Subject and then analyze the quality of construction and condition of the comparable sales. Quality of construction is in a tier rating with Q1 being the materials used are top tier quality (Q1, Q2, Q3, Q4, Q5 and Q6.) Condition follows the same tier rating with C1 being in new and uninhabited condition, hence a brand new home. C1, C2, C3, C4, C5 and C6.
I am going to lay this out in layman terms the best way I can. If the Appraiser derives the Subject is analyzed as a C3 and the comparable is analyzed as a C2, the appraiser then must quantify the market difference on how much more a buyer paid for a C2 versus C3 property and then adjustments are ONLY made to the comparables. Same goes for the quality of construction. The Appraiser analyzes improvements to Subject property and uses those characteristics in a bracketing fashion to reconcile the market value.
This might sound overly complex, and it TRULY is complex. Appraising for market value is not simple and there are other characteristics I haven’t even gone over, but that is why Appraisers are mentored for years and take very complex courses and continuing education to train and to adapt for their career in an ever-changing market.
In all actuality, appraised value is determined for a single point in time. Look at what happened to the market when Covid hit. The market value of properties changes all the time. It is not always readily noticeable in the short term to the average customer eye. Just remember, just because your neighbor’s house sold for one million dollars, absolutely does NOT mean your house is now worth a million dollars. Until next time, happy buying and selling!!
4 comments
Alexander Rees
We went down the lane, by the body of the man in black, sodden now from the overnight hail, and broke into the woods at the foot of the hill.
Ralph Davin
On our side the fire had done no more than scorch the nearer trees; it had failed to secure its footing. In one place the woodmen had been at work on Saturday; trees, felled and freshly trimmed, lay in a clearing, with heaps of sawdust by the sawing-machine and its engine.
Alexander Rees
We went down the lane, by the body of the man in blac, sodden now from the overnight hail, and broke into the woods at the foot of the hill.
Ralph Davin
On our side the fire had done no more than scorch the nearer trees; itt had failed to secure its footing. In one place the woodmen had been at work on Saturday; trees, felled and freshly trimmed, lay in a clearing, with heaps of sawdust by the sawing-machine and its engine.