Ask The Appraiser

Today I’m going to answer a couple of questions I got this week on my Facebook page. I enjoy receiving questions from real estate agents, mortgage professionals, home owners, and anyone else curious about how the appraisal process works. If you have a question you would like included in the “Ask The Appraiser” section of my blog then please let me know and I will do my best to answer it here so that others can gain a better understanding as well.

Question: I have one for you! Here is an scenario for you. Traditional split level home built in the 1970’s in an area with many similar homes.Birmingham, AL real estate appraiser frequently asked questions Former owner has added a very poorly constructed addition. The addition does add an attached 3 car garage and there is one HUGE room with close to 1,000 square feet above the garage, also poorly constructed. Both garage and large room were constructed so that they do connect to the home…you don’t have to walk outside or through unfinished space to get to them. How do you treat this in an appraisal?

Answer: Any time living area is attached to the main residence AND you can access it without having to go through unfinished area it CAN be included in the total gross living area (GLA). The exact amount of value that is added will be in question though. First of all the construction quality will need to be considered, and it may contribute less per square foot than the other better quality part of the house. Second, there may be an issue of it being over improved with more square footage than is typical in the area.

There is a point at which more living area will not add any more significant value to the home. I think the economic gurus call this the theory of diminishing returns. By analyzing recent and similar sales in the area the appraiser will be able to determine a square foot adjustment to apply to the sale to account for the additional area. It may not turn out to be as much as you would expect if it is an over improvement. The appraiser will also need to look at what level of quality is typical and expected in the area and then determine if an adjustment needs to be made to reflect the low quality of the addition. So you have two factors to consider in this scenario, that of questionable construction quality and also of a possible over-improvement.

Question: A pre-qualified buyer and seller come up with an agreed price but the appraiser values the property $8,000 under the agreed on price -no real comparable comps in area-Who sets the price ? I should add the listing agent set the original price which is the agreed price between buyer and seller.

Answer: In this situation there seems to be a difference of opinion between the listing agent and the appraiser. When pricing a home the listing agent typically does a Comparitive Market Analysis (CMA) to arrive at a list price. The CMA should be based on recent and similar sales that have occurred. In addition, active listings are analyzed to determine current competitive properties that the subject will be competing with. If there are none in the immediate neighborhood it is o.k. to use sales from another area, however the area should be one that the buyer of the subject property would also consider as a potential neighborhood they would like to live in. It should have similar quality homes, school system, and other amenities. If this is done correctly the list price will be based on market data. This information can be provided to the appraiser before the appraisal is completed so that they see where the listing agent was coming from when they priced the home. The appraiser may even use some of the same sales as the agent did. The appraiser will determine if the sales are truly competitive and if they meet underwriting guidelines imposed by the lender.

Sometimes two things can happen which result in a difference of opinion between the appraiser and listing agent. The first thing is that the agent may not have based the list price on recent sales but rather an arbitrary number they they or the owner came up with. Sometimes homeowners have an idea of what they want out of a house and they request the agent to list it for that amount. The second scenario would involve the agent using sales that were not comparable to the subject property. If the listing agent and seller feel that they did a good job in pricing the home then they can officially challenge the appraisal, but they must be ready to provide better sales than what the appraiser used or be aware of factual errors that the appraiser may have made. If factual errors were made or better sales are made available to the appraiser then the value can be adjusted to reflect this new information.

Do you have any appraisal questions? I enjoy answering questions to help my clients understand the appraisal process more clearly. Leave me a questions if I can help you out.

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