The appraiser's role in evaluating a house is important -- and not altogether understood by most homeowners. It's easy to confuse the role of an appraiser and an inspector. Both professionals come to a home to judge whether it's worth its asking price, and both make determinations about the home's condition. However, inspectors work for either the buyer or the seller, while an appraiser works for the bank. And an appraiser is evaluating a property in comparison to other properties, whereas a home inspector is evaluating all sorts of structural elements and systems based on predetermined benchmarks.
How does an appraiser evaluate a property?
"The goal of an appraiser is to evaluate a property relative to similar properties that have recently sold," explains respected industry veteran Dina Miller. She further outlines:
- The fact that there has been a financial transfer validates the value.
- Recent sales ensure that market conditions are similar.
- Proximity ensures that the location factor does not change.
A lender relies on an appraiser's evaluation of a home or commercial building to determine whether it's a good or risky investment. An appraiser's evaluation of your property matters as much to the lender as the underwriter's evaluation of the buyer's financial situation. If the appraiser says the property is not worth the asking price, the bank will only approve a loan of the appraised value. If the appraiser says the property may not be a wise investment at any price, the bank may refuse to approve the loan at all.
The main factors an appraiser looks at to determine the value of a property include:
What does "condition" encompass?
"Living space is the main concern of valuation, and often confuses owners," says Miller. Living space constitutes the livable area that is above-grade and is used year-round.
Property features like patios, terraces, pools, and landscaping are typically counted as living space. and can have an influence on the overall condition of the property. But not every part of the house that's been lovingly designed or updated to be a selling point in the homeowner's opinion will increase the value in the appraiser's eyes.
Phrase to avoid: "fully renovated"
Cosmetic updates to a certain room might impress the untrained eye, but they might not mean anything to an appraiser who's seen it all countless times. Be mindful when you claim to have renovated an entire space: An appraiser will evaluate that claim based on a whole list of very specific factors.
"'My kitchen is more special than others' is taken with a large grain of salt," says Miller. "Counters, cabinets, and appliances may not blend as they should. Your refrigerator age is easily checked if you know where to look."
Basically, she says, it's fine to brag, but don't exaggerate.
This goes against every fiber of most real estate agents' inclinations, creating potential awkwardness for the appraiser, buyer, seller and agents alike. The agent thinks exaggerating will help sell the house, the seller has emotional attachments that lead them to over-value, and the appraiser has to answer to the lender.
What in a home's history can come back to haunt you?
Another area where an appraiser's keen eye can derail a transaction is in spotting unpermitted work. Homeowners often want remodels and additions done as simply and inexpensively as possible, but when they skirt the code regulations and get work done without permits, they'll find themselves in a moral dilemma when it comes time to sell. Real estate agents may take the stance that "it's not a big deal and let's hope no one else sees it" if the changes are minor. Appraisers, on the other hand, think unpermitted work is a big deal in that it could cause trouble for their client -- and it's their job to see it.
The appraiser will compare your version with the municipal records. The municipal records-- the property tax roll -- is the official source, says Miller.
Why is unpermitted work a problem?
So for example, if you have converted your garage to a bedroom without getting it permitted, you aren't actually paying property tax for your claimed number of bedrooms, and, therefore, can't get appraised for that number of bedrooms. Furthermore, the unpermitted work is seen as additional risk for the lender, because it could lead to electrical or structural issues down the road.
Even if you sincerely didn't realize there was an issue when you got the work done, an appraiser may sympathize, but they won't change their findings.
One thing that appraisers want homeowners to know is, lenders are oftentimes asking on their end how the value of a property is derived, just as homeowners are -- except the two often have vastly different ideal figures in mind.
Want a loan? You can't sidestep the appraisal
Should you be mindful of the eventual appraisal step when you're getting your home ready to go on the market? Definitely. It's smarter to prepare for it than to attempt to hide things or argue with the appraiser. They're trained to have keen eyes and a fact-based approach that overrides any attempts at persuasion.
"Listing prices in the real estate market are often wishful," says Miller. "Facts are stubborn things and it is the appraiser's job -- and is legally required -- to be objective about how your property compares."