Five Myths About Home Values

A few years ago, when home values were just going up, most homeowners did not question appraisals much.

It was the best of times.

Over the past two and a half years, home sellers and even listing agents quite often question and pick apart appraisals.

It was the worst of times.

A Tale of Two Housing Markets, if you will.

However, the actual appraisal process has changed very little over the course of the housing boom and bust cycle American homeowners witnessed between 2001 – 2009.

Since the topic of home values seems to be a hot discussion, let’s address the top five appraisal myths.

Appraisal Myths / Questions:

“I just put $15K into the property, why isn’t the appraised value higher? ”

Not all improvements to the property are equal in producing added value. A local real estate investment club used to tout buying a run-down, roach-infested property cheap, and (after de-bugging), just adding a fresh coat of paint and carpet, and *presto*, the house would appraise like the new homes up the street.

Even with cosmetic repairs, the property may still be much more comparable to the foreclosure next door than the new home a block away. Look first to the “guts” of the property, the electrical, heating & air, etc. If they are updated, then number of beds/baths and square footage are the next biggest weight, followed by a genuine updating of cosmetic improvements.

“But my home really compares to some of the properties in the neighborhood across the way…”

For example, if a homeowner preparing a house to sell adds $150,000 in upgrades to the kitchen, built-in cabinets and flooring, it may help the property show better in an open house and in magazine advertisements.

However, the seller might still be stuck with a $450,000 appraised value like the three comparable properties on their street vs the $750,000 they were hoping to list it for.

Even though the neighborhood across the main street had similar homes in the higher price range, especially after the seller’s extensive upgrades, appraisers will always use homes from the actual neighborhood to establish value first.

So basically, the seller simply over-improved their home for their specific neighborhood.

“This appraiser included foreclosures as comps – that’s not fair”

It isn’t fair, especially if your home is well-kept and in great condition compared to the run-down foreclosures in the neighborhood.

Unfortunately, if every recent sale, or nearly all sales, are foreclosures at reduced prices, then the appraiser is forced to use the recent sales and trends as comparable values.  High foreclosure rates generally depress values and show a trend of lowering prices. 

And abnormally high foreclosure rates generally depress values and show a trend of constantly lowering value.

Regarding amenities, the opposite is also true. If your home is the same square footage, finish and age as a home a mile away that sits in a golf course community, those neighborhood amenities will add more value than your home will ever be able to see.

“But I just put in a $50K pool, doesn’t that count for anything?”

Pools and professional landscaping rarely see a dollar for dollar value add on a property.  The value is going to mainly be based on comparable sales in a neighborhood.

“How can similar homes in the same neighborhood appraiser for such different values?”

This is a typical question for older neighborhoods where similar models may have drastic price differences.

Additional rooms and square footage can be the main reason for one property appraising higher than another.

Keep in mind,  just because the market trend in a particular neighborhood is improving over time, the individual properties need to meet the same conditional improvements as the others in order rise with the tide.

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An appraiser is looking at several things when determining the value of a property – improvements, size and square footage of the living area, neighborhood amenities, location and the market trends around the area.

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Related Appraisal Articles:

• Mortgage 101 – Appraisal Basics
• What Do Appraisers Look For When Determining A Property’s Value?
  
• Understanding The Difference Between An Appraisal vs Neighborhood Comp
• How Do Mortgage Companies Value A Property That Hasn’t Been Built Yet?

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Brian Maier

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