To answer this question its useful to know that there are ten sections in a standard Uniform Residential Appraisal Report: 1) Purpose, 2) Subject, 3) Sales History, 4) Neighborhood, 5) Site, 6) Improvements, 7) Sales Comparison Approach, 8) Cost Approach, 9) Income Approach, 10) Reconciliation (where her opinion of final value is stated.) The income and cost approach are used for specific purposes. The sections that have the most weight in a residential appraisal’s final value are Sales History & Neighborhood.
Realizing what’s involved in becoming a licensed appraiser today is useful as well. Typical requirements to be a Licensed Appraiser include: a) 165 hours of education from a certified pre-licensing school, b) passing an intensive exam, and c) log two-thousand hours of experience within five years. There are three more levels that require more education and considerable experience.
Considering the requirements to become licensed, the assumption that an appraiser’s opinion of value is more qualified than a full-time veteran real estate agent’s opinion seems logical. During a continuing education class, the instructor, who was an appraiser, stated that real estate agents have an advantage in determining value -- Naturally I sat in my chair eager to hear his explanation. The simple answer surprised me – an appraiser doesn’t go inside homes with buyers. Instead Appraisers rely heavily on the photographs and a description that the listing agent wrote. Because descriptions and photographs can be deceiving, a diligent appraiser will occasionally interview the listing or selling agent on the transaction to learn more about the comparable property he is planning to use.
Appraisers often have their hands tied. A new mortgage lender might require that the comparable properties fit comparable property selection criteria for a given market. For example, in an emerging buyer’s market (declining values) a new mortgage underwriter might want comparable properties to be:
- Located within one-mile of the subject
- To be built with ten years +/-
- Have a size (square feet) within fifteen percent +/-
- Choose two comparable properties that have sold within sixty-days and one within six months of the appraisal date.
In a neutral market or emerging seller’s market (appreciating value) the criteria is similar to the declining market above but lenders give appraisers more discretion. What if you want an expert opinion and a bank or lender is not involved? Chances are that’s not going affect the appraiser’s opinion because the foregoing criteria is prudent whether a real estate broker or an appraiser is performing the evaluation.
When the appraiser comes to measure and take pictures, it seems logical that they should know about all the recent improvements you’ve completed. The gorgeous kitchen, both remodeled bathrooms, and the newly installed sprinkler system. Naturally, you want her to know about the newer roof, furnace, top-of-the-line flooring and designer touches that make your property above average. Appraisers typically have six labels they can give your property: 1) Poor, 2) Fair, 3) Average, 4) Good, 5) Very Good and 6) Excellent.
This is where your hard earned money and excellent choices may let you down. Because appraisers can’t feel, touch, see, and smell the comparable properties, they are inclined to give all of them Average or Good ratings. To add insult to injury, even if the appraiser gives you Very Good and the comparable properties an Average rating, the dollar-for-dollar adjustment is based on a determination by a company called Marshall & Swift -- and in my experience is a mere percentage of what you actually invested or what those improvements might cost today. It’s safe for appraisers to deem the subject and the comparable properties average or good.
This practice can be a disservice when the subject property is stuck in a 1984-time-capsule. Let’s suppose a veteran agent recommends an asking price of $195,000 on a property with 1984 décor and appliances, and an Appraiser recommends $210,000. After eighteen showings the seller didn’t have one full-price offer in a strong seller’s market. It’s because the appraiser should have used FAIR condition on the subject which Marshall & Swift deems as badly worn. A FAIR property needs complete remodeling. The property finally sold for $17,000 less than what the appraiser deemed fair market value (FMV.) Appraisers primarily represent lenders and confirm value versus determine value. Appraisers are versed in reconciling a value that a buyer and seller agreed upon in a purchase contract.
Appraisers are confident in their work and there is very little, if any, that you can do to affect the final value. You might consider scrutinizing the appraisal, getting a second opinion, or maybe a full-time veteran real estate broker, who has logged thousands of hours visiting properties with buyers and sellers, is a good choice too?
