Appraisals: Cost vs Value

First off there are usually three ways that appraisals are looked at in a real estate transaction:

1. What the Seller thinks its worth;
2. What the buyer thinks its worth, and;
3. What the lender is willing to loan on.

While the buyer and seller have come to an agreement on price, this is usually less than the owner wanted to sell for, and more that the buyer would have liked to have paid. This is usually considered “Market Value” i.e. what the current market will pay for the property. The appraiser on the other hand, will use the “Sales Comparison” approach to value.

As a REALTOR® in business since 1984, I find placing a value on property to be among the toughest tasks I do. The agents approach is called a Comparative Market Analysis or CMA. In it I analyze similar properties that are on the market, pending and recently sold. When there are active listings that have very similar amenities to the subject property, these are the competition. No matter if it is a Buyer’s or a Seller’s Market this is the competition, and the subject must be priced below to come in first place and have a potential buyer make an offer. If the subject is dated, a prospective buyer would be looking at the additional expense it would cost after the purchase was finalized in order to bring this property up to today’s standards.  The buyers who are actively looking at the market determine if a property will be the one to make an offer on, versus being their second or third choice.

Once all the terms of the purchase agreement are agreed to, the property goes pending in the MLS and the lender orders the appraisal.

When values are rising, appraisals will sometimes come in low. This is because an appraiser is always looking at sold properties from within the past six months. If you are a typical Owner, the agreed purchase price is a compromise and a higher value was naturally assumed to be the correct value for the property. All owners “believe our properties are worth more than what they would appraise for, it is a natural occurrence. We all remember what the value we could have sold our properties for in 2005/2006. I actually bought in late 2005 and my property is finally worth more than I paid. In addition, if we have owned the house for any amount of time, we have memories of raising our children, births, deaths, etc. Events add an intrinsic value to our properties.”(1)

What are typical adjustments to value in San Diego?

From research on the internet, and speaking with other agents these are some off the adjustments we found: (2) (3)

Barbecue

Not one agent I spoke with, nor myself can ever remember an appraisal where credit was given for a built-in backyard barbecue. Practically speaking, if is an amenity that may give you a nod for a buyer towards one property over another, but do not expect the appraiser to give you a bonus.

Pool/spa

A pool will always get an adjustment, the question is how much. $5,000 to $20,000 for having one. In our multi-climate San Diego County, East County tends to get a little higher than closer to the coast.  It does not seem to matter how extensive the pool is, so if you are considering a pool, spending more will not translate into more dollars when you sell. With recent drought restrictions it has even been seen as a negative. Last year, I showed clients who were considering buying a home with a pool, that they would have filled in!

Bedroom/Bath

Sellers, Buyers, and real estate agents know that there is a different demand between a three-bedroom and four-bedroom home.  However, appraisers are looking at "room count." So, whether that extra room is a bedroom or bath makes no difference. Sometimes on adjustments we see this extra room worth an extra one to two percent in value.

Patio

Appraisers mostly do not care. I have seen credit for covered patio’s however in the $5,000 range. I wonder if this would be true in say Massachusetts, where you can only use it half the year. When I lived in Seattle, you needed that covered patio for your Fourth of July celebration.

Location

Location is subjective. Any credits will be dependent on the appraiser you are assigned. One big problem I see here is sometimes the appraiser comes from out of area. A cul-de-sac location should be worth more than a street with a double line in front, right? Believe it or not, a majority of the appraisals I reviewed ignored location completely.  We know the buyer will not. In real estate, I still believe it is location, location, location. Just don’t expect much or any adjustment from the appraiser.

Lot Size

In plats, this will mostly be ignored. Design, quality of landscaping and hardscaping, are the neighbors looking into your backyard, or you theirs are rarely if ever considered. On the other hand, the lot size shown on County Assessor's bill, will get you more in tax value after the initial assessment when the property was purchased.

Square Footage

You’ll kind of get hit here. After all those other adjustments have been made, the square footage of the home will be adjusted. The question is by how much. You would think that it would be close to the average price per square foot for you neighborhood, however that is not always the case. Especially true if you property is significantly larger than homes in the area. Sometimes we can appeal and be successful. However on one recent sale, even after appealing, the appraiser stuck to their value. They did not want to be wrong.

Fireplace

$1,000 to $5,000 not really sure how they do this one.

Parking

You will be awarded around $5,000 - $7,000 for an extra garage stall.

Air Conditioning

Credits here were between $1,500 and $4,000, regardless of the size of the subject.

View

"How much is the view worth?" Unless you are beach front, you’ll get some credit for a view, but not as much as you would like. Perhaps that is because, as we drive around San Diego, we have awesome views all day. You might see a non-beach view premium of three to five percent.

Condition

Every seller thinks that the extra heavy duty nails, the brand new kitchen and baths, new roof, distressed planking wood are going to get the wanted adjustment. The answer is that there are only three boxes that the appraiser will check: 1) Worse than, 2) Equal to, or 3) Better than the other comparable homes in terms of upgrades according to the appraiser. Homes in pristine condition with the newly remodeled kitchen and baths; the distressed planking floors were considered to carry only a $20,000 to $40,000 premium over their poorly maintained, under-improved counterparts. The bad news here was that properties that only had partial improvements fared worse.

Energy Efficiency

There is a line item on the Appraisal Report titled "Energy efficient items." I have yet to see this taken into account. So as for installing that solar system goes, If you are hoping to get it back when you sell, that is not showing up on the appraisals. It may come soon, (as might water efficiency) but I have not seen it yet. (as of 8/2016)

If the appraisal comes in low, a buyer or seller may ask their agent to appeal. We do if requested. (The buyer usually just wants the house at the appraised value.) Here is how the process works: Federal regulations forbid us from speaking with the appraiser directly. They’re neutral, remember? So, we prepare our appeal and submit it to the lender who forwards it to the appraiser. The appraiser will consider our appeal, including the errors and oversights that we respectfully pointed out. Generally speaking, they will do nothing! After all, they would have to do more work, and we would prove them wrong. In 1986 I had an appraiser on a great house come in three thousand low. He told me that “a two bedroom house would never be worth more than $60,000” in the area. Sometimes the appraiser just wants to be right.

Call us at 858.455.9300 to inquire what your's may be worth.

(1) Foothills Bar Association Newsletter. April 2007

(2) Portions of this report adapted from material from  HR Schlake Real Estate Appraisal & Insurance Services, Inc® 2010

(3) Information also adapted from Zillow® and from Sandicor® MLS  2016

(C) 2016 SoCal Real Estate Group dba Thomas Baker Team