Home Appraisal Myths You Need to Know
The home appraisal process can be nerve-wracking, there’s no doubt about that. You have already listed your home and likely received an offer, so now why after the fact is someone coming in to tell you your home’s value? Isn’t that your Realtor’s job? Can this sink a sale?
It only makes sense for you to have questions, and be concerned.
Fortunately, most house appraisals won’t ruin the sale. There are however some common myths about appraisals that need to be discussed. The more you know what to expect, the less likely you are to be unpleasantly surprised.
Let’s get into it.
The Appraisal Price is What a Buyer Should Pay.
There is an art to pricing homes for sale, and the appraisal is only one small piece of the puzzle. You could hire ten different appraisers to price your home, and get ten different prices – much like with real estate agents.
The appraiser will give an educated opinion on the value of the home based on knowledge and experience. If the appraiser is experienced in your area, then the price will usually be close to the market value of the home, but not always.
It can be pretty frustrating to find out that the bank will not loan the buyer any more money than what the home appraises for.
You, along with your Realtor as well as everyone else involved knows that the appraisal is only one person’s opinion, but it is still the view the bank uses to base their loan decisions whether or not we like it.
Appraisal gaps are more common when it is an extreme seller’s market and lots of bidding wars, very similar to what we have been experiencing in the past several months. Sale prices can often be bid up way over the asking price. In buyer’s markets this issue is far less common.
If the home is appraised lower than the offer price, the buyer will need to come up with the difference if you want to sell at that price. This can be a major issue if the buyer has maxed out their budget. What we are noticing now, is that appraisals are being done weeks after the deal was put together, and we know how fast a market can shift, leaving prices declining and that appraisal value declining with it. Sometimes there is a solution, where both the buyer and the seller have a meeting of the minds. The seller comes down on their price a bit, and the buyer puts more money down to make up the difference. Weighing the pros and cons of keeping the deal together is very important here. This is far easier than disputing an appraisal.
The More Money You Invested in The Home, The Higher it Will Appraise.
Not every renovation or home improvement project adds value to a home. No, you did not read that wrong.
One of the bigger myths in real estate is that every improvement adds value to a home. That is far from the case. In fact, there are some cases where a renovation will bring down the value of a home. Many sellers are confused to hear that they do not get equal value for the improvements they made to the home.
The market value of your home is based on what people are willing to pay for it. Take a renovated garage, for instance. You may have turned your garage into an excellent entertainment room. But the reality is that garages add value to a home, and without a garage to park in, your home is now being compared to homes that never had a garage, thus bringing down the value, even though you spent money renovating it to your liking.
When renovating your home, it is important to remember that what is important to you is not necessarily important to buyers.
Sellers should always be aware of improvements that increase the value of your home before you start a project.
Any good Realtor will tell you – if you are thinking about selling in the next few years, avoid making any upgrades without talking to an experienced agent. Do your research, because it may not be worth it in the long run.
The Appraiser is There to Serve The Needs of The Buyer.
You set your price, you got your offer, and now the buyer is paying for an appraiser to come in and determine the value of the home. It seems logical that since the buyer is paying for the appraisal, then the appraiser must be working for the buyer. But the truth is, the appraiser is there to serve the needs of the lender.
The lender requires an appraisal before it will lend money to a buyer. Every lender has a process and they do not deviate from it, no matter how many comparable properties we present them with ourselves.. They are in the money business after all and they want to be absolutely sure that they can keep their business running, so the lender has to make sure that they’re only lending exactly as much money as the home is worth, not a penny more.
There are laws that prohibit any coercion of the appraiser, as well as the Real Estate Agents involved. A good appraiser takes pride in being unbiased, and would never risk their business or reputation to help a single buyer out. While you may or may not agree with the appraisal, you can pretty much guarantee that the appraiser came to the price on their own.
People often wonder exactly what the appraisers are looking at that would increase the value of the home. As a homeowner, this is important to know so you can increase your chances of not having an appraisal issue.
Buyers can protect themselves when making an offer by having an appraisal or financing condition as well. However, in a hot real estate market that favours sellers, many home buyers will not include these conditions to make their offer more appealing.
A Nicer Home Means a Higher Appraisal.
You can have the biggest and most beautiful home on the block, but that does not guarantee that the appraisal price will reflect how exceptional your home is. In fact, standing out doesn’t always translate into a good thing. This is something that I always make a point of mentioning to my buyers during the search for their new home, and this is why…
Homes are priced based on their area, most specifically their neighbourhood. Among other things, the appraiser will consider the size and amenities of other homes in your neighbourhood to determine the price of your home.
The appraiser will price your home similarly to other homes in your area. If you have higher end finishes or more square footage than the other homes in your area, yours can be appraised somewhat higher, but not potentially high enough to get the value you put into it back. The key is that the appraiser will need similar homes to compare yours to to establish precedent for the value they are assessing. Failing that, they may not be able to justify the appraisal to the lender.
Be the Little Fish in the Big Pond.
Having an exceptional home can actually make your home seem less desirable to buyers looking in your area – higher utilities, higher property taxes, more to clean, more to maintain.
If you’re surrounded by lower-priced homes, it will naturally bring your home’s value down.
One of the most common examples of this being an issue is when someone buys a vacant lot to build a new home. They proceed to build a stunning custom property but it doesn’t conform to the characteristics of the existing neighbourhood. When the rest of the homes are worth $400,000, it is not smart to build something that should be worth $800,000. It makes things 100 times harder to appraise.
When it comes to home value, you are 9/10 times better off being the smallest house on the nicest street. Alternatively to the previous scenario, being surrounded by higher priced homes brings up your value. When you are the biggest house on the block, with the most renovations and high end finishes, it’s much more difficult for the appraiser to come up with comparable properties to yours, therefore the appraisal may not always reflect the value you require from the bank. So many sellers have a hard time understanding how much location can play into the value of the home.
The Assessed Value, The Market Value, and The Appraised Value Are The Same.
Assessed value is for Tax Value only.
While a large percentage of people think that this value has bearing on your market value, it just is simply not true. Assessed home values are just used for a city or town to collect an appropriate and sufficient amount of taxes.
Appraised value is the opinion of a qualified appraiser.
The appraised value is often done either during the purchase and sale of a property or a refinance by an existing owner. Lenders use appraisers to value a property to establish what a borrower's loan should be on a specific property.
Market value of a home is the price a buyer is willing to pay and the lowest price a seller would be prepared to accept.
Generally, an appraised value and market value should be similar.
There is one more value to add to the list, the Online Value.
The Virtual Value is an online valuation. While there are many online valuation tools, and they are used (in my opinion) These values are more often than not off by tens of thousands of dollars and sometimes much, much more. It can be on either end as well, both too high or too low. These estimates are not reliable and should not be used as a marker for real property value.
All in all, there is a lot to know about what goes into a home's value, but after reading through these points I hope that you have a better understanding of some very common misconceptions about appraisals in the Real Estate purchase and sale process!