Indecent Appraisal

There is no such thing as absolute value in this world. You can only estimate what a thing is worth to you. – Charles Dudley Warner

Good day everybody. I hope your week was wonderful. Mine was all real estate, all the time. Actually, I did get some family, church, a little sleep and one college hoops game in there as well. But enough about me, on with the show!

This week’s topic is another area where confusion can rule the day for those who don’t deal with real estate transactions frequently. That topic is the real estate appraisal. An appraisal is defined as “the expert estimate of the value of something.” The key word in that definition is estimate. Appraisals contain so much gray area and can be so subjective, that they are increasingly at the center of complaints and litigation. Many things are appraised. You may have had inherited jewelry, or firearms, or an antique you bough at a garage sale appraised by an expert in that particular field. Gems, coins, tools, electronics, musical instruments, and many other things you might not realize can, and are, appraised from time to time. When a value has to be established for an asset, a qualified person uses various methods to estimate what that asset is worth. Let’s look at how a real estate appraisal is performed.

When a home, commercial building, or piece of land needs a value affixed, the appraiser will begin by performing a physical inspection of the property. With a house or other building, this means gaining access to the property, inside and out, taking photos, and making notes on the condition, size and features of the home. The appraiser will note the size of the rooms, the number of bathrooms, the “finishes” (i.e. granite counters, appliances, tile vs. carpet, etc) present in the home. He or she will also note whether the home conforms with the neighborhood. For instance, is it the nicest home in the area? The most run-down? Or is it comparable in size and age and style with the average home in the neighborhood?

The next step is to find comparable properties. Or “comps”, to provide perspective and establish the trend of property values in the area. Comps are usually divided into two categories: sold and active. Sold are self-explanatory, but active comps are properties that are on the market now. Sold comps are best if they have sold in the last 3 months. Sometimes the appraiser has to go back farther than that in order to have enough sold comparables. Comps are where appraisals can get tricky. What is the “area” used to draw the comps from and how is the neighborhood defined? In larger cities, the area from which comps are selected might be only a few blocks in each direction. Any farther than that and the whole appraisal can be called into question. In Artesia, the entire city is generally accepted as the area from which comps can be taken. Local appraisers who know our market will use the whole city as their comp ground. But when appraisers come in from out of town, they tend to try to pull comps from only the immediate neighborhood and that causes problems. A town the size of ours is too small, with too few real estate transaction to restrict comps to one 5 square block area.

Once the comps are selected then an average value of homes can be established. This is the “baseline” from which the value of the subject home will be calculated. Adjustments are made for differences in size, age, style and finishes. Again, this an area where problems can arise. What do granite vs. laminate counter tops add to the value of a home is very subjective. All finishes or upgrades in a home are similarly subjective. Our market values high-end finishes differently than do the Los Angeles, Dallas, or Chicago markets. I may feel that tile shower surrounds are more valuable than cultured marble, but that is projecting my preference into an appraisal if it cannot be supported with evidence. After the various adjustments to the baseline are made, a value is estimated.

It’s not very scientific, and it has flaws, but it is the system under which we live. Here are some things to remember if you have an appraisal come in askew on your property: If you paid for the appraisal, you have the right to receive a copy of it; Appraisals are not written on stone tablets and can be challenged. Speak to the lender who ordered your appraisal if you think there are errors or oversights in it. Look at the comps used to make sure they were the best comps available for your property. If you believe one or more of the comps are deficient in some fashion, questions the use of that comparable. Home buyers and home owners who are refinancing their home often feel they have no recourse when the appraisal comes in conspicuously low. I’m here to tell you – you do. Call your lender and ask questions. Call a real estate professional for advice. It’s free, and we have dealt with these situations before and can help. Don’t take it lying down. You are the customer, and you should be satisfied with the product for which you pay. Does that mean every appraisal should turn out the way you want? No. Sometimes, appraisals are just expensive bad news. But it’s your right to question how that news was divined by the professional you paid.

In the aftermath of the housing crisis, appraisers face enormous pressure to keep appraisals low. Some have been sued by lenders for overvaluing properties and putting banks on the hook. Many appraisers are cautious at best, and cowered at worst, by the stories of litigation and large judgments. These are useful things to keep in mind if you will be needing the services of an appraiser in the near future. You cannot ask for a specific appraiser, but you can ask that your lender use local professionals who know this market. Ask to receive copies of not only the appraisal, but also any correspondence between the bank and appraiser. Knowledge is power, and I hope to give you ample power to be your own advocate.

All Real Estate.  All the Time.

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