White and Red Wooden House with Fence

The Art of Appraisal

As much as real estate pros try to get it right, the act of assessing the value of a property is very much a subjective process. Licensed appraisers learn all there is to learn about the subject and still don’t get it right sometimes. The same is true for real estate agents. No matter how much minutia is in the mix, you can only get so close to the real value. That is because the real value is only what someone will pay. Sometimes that’s higher or lower than an appraisal. A rogue sale (a buyer who grossly overpays) will add another dimension as an owner can latch onto it to justify their price. I have often used appraisers to bring in reality with an impartial opinion of value. Sometimes this backfires too with a radically low appraisal. Still, it works more often than not and helps homeowners “get real” about what to expect for offers.

Having said all that, let’s look at what drives pricing a property correctly, if imperfectly. Of course, the single most objective sources are past sales. Not likely to get the exact same sales comp sold on the same street, we are already in subjective territory, and must adjust up or down to compare it with the “subject”, the home we are hoping to put up for sale. After weeding the comparable sales into a group with the same number of bedrooms, bathrooms and approximate size, of utmost importance is location, as nothing can affect the value more. Homes with close proximity to a town center, school, a beach, a lake or other waterfront, will be worth more than those farther away. The next consideration is calculating dollars per square foot for all the comps to level out the differences in home sizes. This is a useful metric to determine an average $/sf to compare with the subject’s projected sale price.

Then it’s important to remove any sales comps which are drastically different in condition from the subject. You want to look at homes which look similar and have nearly the same level of finish as the subject. Adjustments should then be made for elements missing from either the subject or the sales comparables, such as a garage, air conditioning, a new roof, extra land, etc. This is where the process can go off the rails. Estimating these values can be tricky, but this needs attention to get as close to the correct value as possible. Professional appraisers take this stuff to the nth degree and may still be off the mark. I’m sure most of my colleagues have experienced this especially when there is a mortgage of 90% or higher, and the appraisal has blown up the sale.

More adjustments should be considered if the subject is near a homeless shelter or a cemetery. Stats indicate a 12.5% lower value for those properties. But, presumably, the sales comps have nearly the same proximity. If they don’t, an adjustment is warranted. Other detractors to value are: strip club: -14.7%; high renter concentration: -13.8%; homeless shelter: -12.7%; power plant: -5.3%; shooting range: -3.7%; Hospital: -3.2%. These are national statistics and may not apply in some areas.

Listening to your cousin Vinnie who “knows” real estate may seem like a good idea, but only a professional who has access to sold data and the skill to put all the factors into perspective can bring reality to assessing value. But, as you can see even with the most skilled opinion of value, getting close is all you can ever expect.

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