One of the most important players in a real estate transaction often flies under the radar: The Appraiser.
How do you know that your home was worth what you paid for it?
How did the bank determine if the loan was secured properly?
How did the seller and their agent come up with the list price in the first place?
The work of one person – an appraiser – answers the above and represents the grease that keeps the wheels of real estate turning. An appraiser is an independent, impartial, and objective professional in the mortgage transaction who develops a report which is a credible, reliable, and supported opinion of value. The work that they do has a direct impact on how much buyers might pay for a home and whether a loan may be approved at all for the property.
John Chapman, co-owner of Omni Appraisal Services based in Fairfax, VA who has over 30 years of appraisal experience, recently spoke to a packed audience of McEnearney Associates | Middleburg Real Estate | Atoka Properties agents who turned out to hear how appraisals may be affected by National Association of Realtors® (NAR) changes in how buyer agents are paid for their services, among other topics.
“Our job is to reflect what’s going on in the market,” Chapman explained. “We’re not creating the value, we’re just reporting what we see in the market.”
Data used in an appraisal report is culled from various sources, the most important being information shared by agents. Chapman explained that appraisers are looking at previous comparable sales transactions, called “comps,” for as much detail as possible in the listing notes. Appraisers want to see hard data like plats, surveys, list of improvements/renovations, an array of pictures of the property, and whether there were multiple offers. But appraisers are also looking for insight agents may have gathered in their own research on the comps used to set a price. This could include details such as whether the home is being sold in a divorce (which could decrease sales prices), if there was an odor (such as from smoke or pets), what traffic noise could be heard from the property, and what concessions may have been offered to the buyer.
“Each situation is case-by-case,” Chapman said when asked about the deciding factors in creating a report. “There are all these little clues that I’m trying to piece together that come up with my value report.”
Beginning August 14, concessions from a seller could also include money to pay a buyer’s agent’s fee. Historically, those agent fees were paid through “cooperative compensation” whereby the seller’s brokerage shared a portion of the sales commission earned with the buyer’s brokerage, and this commission amount was advertised in a local multiple listing service (MLS). But recent NAR changes mean that all concessions – including home inspection repairs, closing costs, and other buyer fees – are negotiable between the seller and buyer within the terms of an offer and not determined at the time of listing.
Chapman is concerned that not all agents will report concession information the same way, potentially leaving out important comparable cost data that could help in more accurately determining the value of a subject property.
Some complicating factors in determining a home’s value are specific to our region, Chapman noted. For example, because of low inventory there may not be comps for a subject property and the appraiser will have to look further than the standard 3-6 months of sales to find a comparable property. This is especially true for unique properties and homes in the luxury market. There’s also the way that different jurisdictions count square footage, where some include basements and some do not, depending on how much of the basement is above-grade (it gets complicated!)
Chapman also shared that kitchens offer the most value to a property, followed by bathrooms. Green and renewable energy features are starting to become a factor in appraisals because of new lending guidelines to factor their value into a report.
Also of note: building cost increases due to post-pandemic inflation and supply issues. “It costs more on a per square foot-basis – labor, materials – to build a house now prior to (COVID-19),” Chapman shared. “What appraisers are adjusting for … has increased over the past few years to match the market.”
If you are considering selling or buying a home, here’s what your future appraiser would like you to know.
For Sellers:
- Review your tax record to check for errors or missing information.
- Provide your listing agent with a list of all home improvements and their dates.
- Document features that may not be readily observable, like hardwood floors under carpeting or an easement.
- Understand that what you have paid for home improvements may not equal the value these improvements are given in the appraisal report. A $100,000 kitchen renovation doesn’t necessarily equal $100,000 in market value.
- If you conduct a pre-listing appraisal, expect that it may be out-of-date by the time a buyer’s appraisal is ordered. While you can share that information with the appraiser, it may not have much influence on the final value.
- Be careful about “testing the market” and pricing higher than recent comps. Even if a buyer is willing to pay an inflated price, the home may not appraise at that price and the deal could be in underwriting jeopardy.
For Buyers:
- Exercise your right to have an appraisal conducted, even if you are paying cash. This is likely your most valuable asset so you’ll want to know what you have!
- If you have an Appraisal Contingency, stay on top of the deadlines and communicate with your lender about any information you learn through the appraisal process.
- Be prepared that a home may not appraise for the contracted sales price and discuss a strategy with your lender and agent for next steps.
Pricing a home is often likened to “an art, not a science” given all the factors that are used to determine value. The appraisal process helps to put hard data into the mix to give buyers and their lenders the confidence that they are getting their money’s worth. Consult with one of our Associates to come up with a plan to value, price, and close on your home!
