By John Moran—I hear the following statement at least five times a day, “My neighbor’s house is listed for X and mine’s bigger, so my house must be worth Y.” Replace X and Y with values that make sense in your neighborhood and you’ve probably heard it too. For this reason, I am going to go over the basics of how a residential appraiser finds value. (FYI-This is not how income-producing properties are appraised, but that’s another subject for another article.)
Residential appraisals are usually based on the three closest comparable sales or “comps.” A common mistake borrowers make is comparing their home with a home that is listed for sale on the market. Just because someone lists a home for $1,000,000, doesn’t mean that’s what its worth or that someone would pay that amount for it. That would be the first inconsistency with the statement above. Appraisers will check the recent sales in a neighborhood and usually they try to stay within one mile if possible. Pending sales may be an optional addition to an appraisal for a little extra support, but they cannot be used a true comp unless they are closed and ownership has changed hands.
Another common mistake people will make in trying to determine their own home value is ignoring comps that are lower. An appraiser can’t simply ignore comparable sales that are lower than the target value; they have to take into account any home that is similar to the subject property. It’s easy to search through recent sales and pick and choose a home here or there that would support a home’s higher value, but the underwriters who approve loans have access to the same recent sales list. If you ignore comps, the underwriter will throw out or cut the value on an appraisal, making it virtually useless. Appraisers who do this repeatedly will get themselves blackballed from lenders and probably be out of business shortly thereafter.
Now we know what appraisers use to determine value, how do they come up with the exact figure? An underwriter will line up the subject property and the three closest comparable sales and adjust them for positive and negative attributes. For instance, if the subject property has more square footage than one of the comps, that property will be adjusted downward. Other attributes that may cause increases and decreases in the home comparisons are number of bedrooms, number of bathrooms, lot location, views, lot size, garage size, upgrades to kitchen and baths, fireplaces, and on and on. Many of these items are quantifiable such as number of bedrooms and bathrooms. Others are more subjective like views and lot location. After putting all of these variables together for each comparable property versus the subject property, the appraiser comes up with adjusted values for the comps based on the sales price plus or minus the adjustments. It is then just a matter of averaging the three values and coming up with a final value figure.
So you can see, the time the appraiser is actually inspecting the property is only a fraction of the time spent on each appraisal. Also, the value is not affected in any way by the listed sales price of homes in your neighborhood.