What is an appraisal?
A home purchase is the largest, single investment most people will ever make. Whether it's a primary residence, a second vacation home or an investment, the purchase of real property is a complex financial transaction that requires multiple parties to pull it all off.
Most of the people involved are very familiar. The Realtor is the most common face of the transaction. The mortgage company provides the financial capital necessary to fund the transaction. The title company ensures that all aspects of the transaction are completed and that a clear title passes from the seller to the buyer.
So who makes sure the value of the property is in line with the amount being paid? There are too many people exposed in the real estate process to let such a transaction proceed without ensuring that the value of the property is commensurate with the amount being paid.
This is where the appraisal comes in. An appraisal is an unbiased estimate of what a buyer might expect to pay - or a seller receives - for a parcel of real estate, where both buyer and seller are informed parties. To be an informed party, most people turn to a licensed, certified, professional appraiser to provide them with the most accurate estimate of the true value of their property. The general purpose is to ensure that, should the buyer default for any reason, the lender can sell the property and recoup their money without sustaining a loss.
So what goes into a real estate appraisal? It all starts with the inspection. An appraiser's duty is to inspect the property being appraised to ascertain the true status of that property. He or she must actually see features, such as the number of bedrooms, bathrooms, the location, and so on, to ensure that they really exist and are in the condition a reasonable buyer would expect them to be. The inspection often includes a sketch of the property, ensuring the proper square footage and conveying the layout of the property. Most importantly, the appraiser looks for any obvious features - or defects - that would affect the value of the house.
Once the site has been inspected, an appraiser uses two or three approaches to determining the value of real property: a cost approach, a sales comparison and, in the case of a rental property, an income approach.
The cost approach is the easiest to understand. The appraiser uses information on local building costs, labor rates and other factors to determine how much it would cost to construct a property similar to the one being appraised. This value often sets the upper limit on what a property would sell for. Why would you pay more for an existing property if you could spend less and build a brand new home instead? While there may be mitigating factors, such as location and amenities, these are usually not reflected in the cost approach.
Instead, appraisers rely on the sales comparison approach to value these types of items. Appraisers get to know the areas in which they work. They understand the value of certain features to the residents of that area. They know the positive and negative factors in the area, including traffic patterns, school districts, and local amenities (such as access to shopping and employment), and they use this information to determine which attributes of a property will make a difference in the value. Then, the appraiser researches recent sales in the vicinity and finds properties which are ''comparable'' to the subject being appraised. The sales prices of these properties are used as a basis to begin the sales comparison approach.
Using knowledge of the market value of certain items such as square footage, extra bathrooms, hardwood floors, fireplaces or view lots (just to name a few), the appraiser adjusts the comparable properties to more accurately portray the subject property. For example, if the comparable property has a fireplace and the subject does not, the appraiser may deduct the value of a fireplace from the sales price of the comparable home. If the subject property has an extra half-bathroom and the comparable does not, the appraiser might add a certain amount to the comparable property. The amount of the addition or deduction is what the market will pay for that additional feature.
In the case of income producing properties - rental houses for example - the appraiser may use a third approach to valuing the property. In this case, the amount of income the property produces is used to arrive at the current value of those revenues over the foreseeable future.
Combining information from all approaches, the appraiser is then ready to stipulate an estimated market value for the subject property. It is important to note that while this amount is probably the best indication of what a property is worth, it may not be the final sales price. There are always mitigating factors such as seller motivation, urgency, or ''bidding wars'' that may adjust the final price up or down. But the appraised value is often used as a guideline for lenders who don't want to loan a buyer more money than the property is actually worth. The bottom line is: an appraiser will help you get the most accurate property value, so you can make the most informed real estate decisions.
What is my home worth?
As appraisers, we hear this question regularly, and not only from customers, but from neighbors, business associates, friends, and just about anyone that owns a home! Unfortunately, as professional appraisers, we are not allowed to answer this question. USPAP (Uniform Standards of Professional Appraisal Practice), which is the set of rules that all appraisers adhere to, defines an appraisal as "the act or process of developing an opinion of value", which essentially means that when a neighbor says "How much do you think I could sell my house for?", the appraiser could be held legally liable were he to actually respond to the question with either a specific number, or range of value.
THE ONLY WAY that an appraiser can offer an opinion of value is to do the legwork and research necessary to arrive at a mathematical conclusion.
That being said, there are a variety of ways to at least get a reasonable idea as to what your home is worth. Keeping in mind that information is more available, reliable, and accurate in metropolitan areas, here are a few things you can do to research your house (assuming the resources are available in your area).
1. Get your tax record. In many areas the record is available online. Do an internet search for your county name and "CAD" (county appraisal district) or "tax records" or similar. Here are some links to the county tax offices for Travis County, Bexar County, Harris County, Tarrant County, and Dallas County.
2. Once you have your tax record, you will have reasonably accurate information regarding the age and size of your home. Appraisers are primarily concerned with the "GLA" which is the "gross living area" or air conditioned space ABOVE GROUND (basements are calculated differently). So while your house may be 30'x 60' and have a basement, for our purposes it is only 1,800sf, not 3,600sf. Don't worry, the basement space has value and will be accounted for, just like garages, porches, patios, sunrooms, etc!
3. Next, look at homes for sale in your immediate area that are SIMILAR to yours. This means homes that are in close proximity, that are of similar size and age, have a similar number of bedrooms, are in similar condition, are on similar lots, have similar views, etc. In a perfect world your house has an exact duplicate directly adjacent to yours that just sold last week. This is rare (or non-existent from my experience!) so focus on getting as close as you can. If you prefer not to be seen as the nosy neighbor, many areas also have online sites sponsored or managed by the local real estate board. Here are some links to the Austin, Houston, and San Antonio sites. Dallas has several, so it may be easiest to go to the national source, Realtor.com.
4. Once you have narrowed down the homes that are fairly similar to yours, look at the listings to determine what they have that you don't, and vice versa. For example, they have a 2-car garage and you have a 1-car, or they have a completely remodeled kitchen while yours is more... "classic". Do you have construction grade carpet and sheet vinyl floors, while your neighbor has hardwoods and ceramic tile? Did you knock out a wall for a larger master bedroom, but now have only 2 bedrooms while most homes have three? While it is most likely beyond the scope of what you are looking for to do the math to determine the value of these differential items, just think about what you would pay for one over the other. Think of it this way: If there were two houses side by side, and one had hardwood floors while the other did not, how much extra would you be willing to pay for the one with hardwoods? Or if the only differentiator was a remodeled kitchen? You get the general idea.
Things to avoid placing much emphasis on:
a. The "cost per square foot" method. If a realtor trys to talk to you in those terms, find another realtor that will do an actual CMA (competitive market analysis) for you. Cost/sf is virtually worthless unless everyone in your neighborhood has the exact same house in the exact same condition. Here is a link to a blog post discussing it in more detail.
b. Understand the difference between an improvement (aka upgrade) and a repair. Remember that there are things people expect to have in all homes. One client was upset that I didn't count all the money she spent on tearing out the walls and putting in new drywall, texture, and paint (she had removed old faux paneling and found it easier to just pull everything). The problem with that is that a buyer expects to have drywall (or walls of some sort), so from a buyers perspective it is no different than every other home they have looked at where no one had put up paneling to begin with. Or "we repaired all the soffit and fascia and gutters". This is "maintenance", not improvements. If they had installed new gutters, that is an improvement. Or updating old brass faucets and doorknobs with brushed nickel, or putting in new ceiling fans. These are minor upgrades, and have value. Replacing an old laminate countertop with a new laminate countertop is not. Use tile, or granite, or Silestone if you want to make it an upgrade.
c. "Cost" vs "Value". Because you spent $25,000 remodeling your master bath does not make it worth $25,000 more. Very few home improvements return 100% of their cost.
d. Websites that say they can tell you the value of your home. Yes, they are fun to play with, and see how you compare to your neighbors, but I review most of these sites several times a year against my appraisals, and they are rarely within 10% of the true value. But if you don't mind selling your $300,000 home for $30,000 less than it is worth, or pricing it out of the current market range, go for it! If you must play, here are a few of the sites you can try:
Zillow.com - they have kind of gotten away from the "what is my house worth" and are focusing more on brokering sales, but there is still good info on their site.
Housevalues.com - they will provide a value for you, but you have to submit your info and an email address, and they will send it to you via email.
Yahoo Real Estate - fast and simple, type in your address and get a range of value.
eppraisal.com - similar to Yahoo, although vastly different range based on the address I entered.
There are plenty of other sites that mirror these. Have fun and explore, but remember that when it is time to set a price for your house, get a full CMA from a realtor or call an appraiser!
Some other tricks if you are looking at a house in a different area than your own (or just don't want to get in the car):
Microsoft Virtual Earth and Google Earth have the best satellite photos, and "birds-eye view" to let you really see the area around your house. Is the house next door a weekend car-repair shop? Check it out from above. Is the house next to a busy freeway, or a water tower, or electric lines? Check it out! Both have to be downloaded, they are desktop applications.
A newer and excellent web-based application is Googles "Street View", which shows you front photos of every house on the street. It's a little disconcerting at first, but it is a great help for appraisers. It's only in some major cities. If it is available in the area you are looking at, there will be a button at the top of the map that says "Street View".
Interested in some general statistics about your city or zip code? Go to www.city-data.com for more info than you could ever imagine...
Of course, the best way to determine the true value of your home is to ORDER AN APPRAISAL!