How do appraisers work in an appreciating market?

appraising-in-an-appreciating-marketI’ve been asked how appraisers account for value changes in an appreciating market, so I thought I would share with you how appraisers approach this situation. Some people believe that due to recent shortages in inventory that home values are starting to show appreciation, however I think that these occurrences are not widespread and do not have the momentum that we saw previous to the real estate crash. I believe that unemployment and the economy will need to show sustained improvement before we see the kind of market we had several years ago. Basic economics tells us that if the supply decreases and demand stays the same or increases then prices typically rise. With that being said I do believe that appraisals do need to reflect low inventory levels and the subsequent effect on prices.

Because there is an upward trend in prices in some areas many agents and owners are curious about how appraisers will handle this in their appraisals. Most appraisers will do their best to use the most recent sales they can find so that their prices will reflect what is occurring in the market now. Finding sales that have closed within 90 days should provide a good indication of current supply and demand. Whenever there have not been any sales in the immediate subdivision or neighborhood within this time frame it’s a good idea to look to other nearby competing areas that a potential buyer might consider buying in. When I say competing I mean that the school system, access to work areas, price range, and quality of homes will be very similar. By doing this we can still get a good idea of current market conditions and the value should be more accurate. If you insist on using an older sale in the same subdivision you must then account for appreciation rates which can be difficult unless you have a lot of sales data. It can be done but the more adjustments you have to make to a sale the less comparable it becomes.

In addition to looking at closed sales we also have the option to consider and analyze listings and pending sales. Depending on the stage of the pending sale they can potentially be the best value indicator we have. If financing has been obtained, the appraisal is complete, and everything else is complete, then they are reflecting what is going on right now, not two or three months ago. Pending sales and active listings are very important in pre-listing appraisals because they show what is available for sale now and what the subject property will be competing with. It would not be wise to estimate the value of a home at a certain value if several other very similar homes (comparables) are listed for sale at a lower amount. It is also important to look at how long these homes have been listed for sale. A home that has been listed for sale for 3 months is a better indicator of what your competition is than one that has been listed for a week because the first one has had time to be exposed to the market. With this exposure the price has had time to adjust to supply and demand levels and better reflects the characteristics of the real estate market.

As you can see appraisers take into consideration a lot of factors when providing an opinion of value for your home. If you believe that you live in an area with appreciating values make sure that your appraisal contains recent sales and listings so that current market conditions are reflected in the final value estimate. What are your thoughts? Let me know by leaving me a comment below or calling or emailing me.

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