We have asked Gary Ashton, CEO/Owner of Ashton Real Estate Group in Nashville, Tennessee, to talk about a common problem that most appraisers face from time to time, the problem of two values on a property. But, instead of talking about it from the appraiser’s perspective, we are going to look at the impacts from the real estate agent and the home buyer/seller… the customer.
Gary, it is great to have you help us look through the lens of the customer. Explain how the real estate agent’s perspective to property valuation helps the customer.
Since the real estate agent works so closely with the borrower It is often the real estate agent that works through the appraisal issues with them to help them understand how it works. When home buyers and sellers are not aware of how an appraisal typically works or what an appraiser is looking for, they can be vulnerable to disappointment or actual missteps during their real estate transaction. For example, buyers may rely on some type of guesstimate of their properties value that they pulled from the internet. They may also have an older appraisal report and they may assume it is the present value. If the new appraisal is obtained, they may not understand why the value from the new appraisal can be so different from the older appraisal or from their guesstimate.
Another common issue occurs when the lender may choose to obtain a second appraisal report from another appraiser. This is can be a difficult situation for the appraisers involved, but it can be even more difficult for the customer. Communicating to buyers and sellers why homes may receive two different appraised values can help them make more informed decisions.
Can you give us more detail surrounding customer issues with multiple values?
Gary: The home appraisal is one of the most vital aspects of the home selling or buying process, but it might also be one of the most misunderstood to those outside of the appraisal industry. Many buyers and sellers may understand that if the value of a home comes in lower than the contract price, it could affect the mortgage loan. However, there are many aspects of the appraisal report that are not as clear. For example, many of those customers may not understand why appraised values can change within a relatively short period of time or how two appraisers looking at a property can report different values. To better serve clients, a good real estate agent would help buyers and sellers through the general logic of an appraisal report in this context.
What are the most common issues that occur from multiple values you have to explain to customers?
In most cases the primary issue surrounds the selection of the comps from the appraisers. Establishing the home’s value relative to the neighborhood is an important part of the appraisal, and buyers/sellers should be made aware of what that might entail. Appraisers look at recent sales of homes of a comparable age, size, quality, and features. In some areas, it can be very simple for appraisers to find home sales from the past few months. In others, it may be much more difficult. Custom homes in markets where each property varies widely often require more research to locate comparable properties. This is also true for areas without much turnover.
Selecting comps that are relevant not just to the neighborhood, but also to the home’s placement within it, is important. Having too few comps to choose from may lead to larger variations between appraised values from appraiser to appraiser. From the point of view of the buyer or seller there may be a temptation to question the validity of the comps; especially if the value of the home is lower than expected. However, the connection between the home in question and the comp is often not immediately apparent to the untrained eye. Buyers and sellers that are walked through the logic of these decisions will often have a different perspective once they fully understand.
From your perspective, why do you believe the comps vary so much from appraiser to appraiser?
The appraiser is limited to what they can see during their visit or verifiable information they are privy to. The value of the property is determined largely by these factors:
- current demand for homes in the area
- lot size
- square footage, above-ground and below
- general condition and quality of the structure
- number of bedrooms and bathrooms
- features and amenities, such as view, pools, garages, fireplaces, and decks
Customers need to know that appraisers need information about recent upgrades or additions over the past five years. This information can help to decrease a home’s relative age and possibly increase its value. Appraisers may estimate the rough age of rooms that are commonly updated, especially kitchens and bathrooms. If they do not have accurate information, they may consider that a space is much older than it is and adjust it accordingly.
Are there other reasons when multiple values can cause complications?
Changes to a property can also change its value within a short period of time. Some buyers may not understand that a homeowner who sees a lower appraised value may make improvements to meet deficiencies which result in a higher value on the second appraisal report, sometimes within a relatively short period of time. It is important that a good agent explains the before and after.
Similarly, some homeowners/sellers may make an incorrect assumption that any renovation project will increase a home’s value. They may make costly renovations that do not change the value at all. For instance, removing granite counter tops to replace with another color of granite counter tops, or putting in certain green features may not change the value, but it could change the marketability of the home. It can be difficult to explain that cost does not necessarily equal value.
There are also instances in which the second appraisal can yield a lower value. For example, a homeowner may not realize the implications that may come with the removal of a bedroom or constructing unique amenities that others may not find appealing. Having a greater understanding of appraisals and home values may help homeowners make informed decisions when choosing to renovate their homes.
What do you believe is the best way to educate clients on these types of issues?
While home buyers, sellers, and owners do not need to become licensed appraisers, they may truly benefit (financially or even emotionally) from understanding the basics of what goes into a home appraisal in both the short and the long term. Real estate can be a highly subjective industry. Being able to communicate some of the more complicated concepts in an understandable way may be an underrated tool.G