Don’t Fall for These Real Estate Appraisal Myths

It’s been several weeks now since I’ve blogged and to be honest I’ve missed it. Blogging provides me a creative outlet to help educate the public on the appraisal process.

If you had told me in 2010 that I would still be writing my appraisal blog 14 years later I would have said you were crazy, but here I am. Much has changed in the appraisal world from when I first started writing but one thing remains the same and that is the need to put out accurate information about how and why appraisers do what they do.

In this week’s post, I dispel some common appraisal myths that have been around for years. I think it is important to revisit these inaccuracies for the benefit of new people getting into the real estate market.

If you are a new agent or even a more seasoned pro and have an appraisal question please don’t hesitate to contact me, I’d be glad to chat with you and clear up any misinformation you may have heard.

10 Appraisal Myths You Should Not Believe

Myth #1: All real estate appraisers are the same

All appraisers are not the same and they vary based on the amount of education and experience they have. At a minimum, appraisers must be certified by the state in which they practice.

While many appraiser’s education stops at what is required by the state, there are others that extend their knowledge by taking additional classes that may be required by the professional organization they belong to. Some of these classes are specialized and may make the appraiser more of an expert in a specific area of appraising.

In addition to more education, some appraisers set themselves apart from other by the years of experience they have. While everyone must start at the beginning an appraiser with 30+ years of experience will be more knowledgeable than someone who has only been in the profession for a year, so it is important to ask them what type of experience they have.

Myth #2: Appraisals are the same as the Zillow Zestimate

The Zillow Zestimate is a type of AVM (Automated Valuation Model) that takes information that is fed into it and uses it to spit out a value. Guess what? The information that Zillow uses to base its value estimate on is not always accurate.

In addition to inaccurate subject property information, the AVM cannot see the inside of the property and smell the 15 cats that may live inside or see the 25 years of cigarette smoke on the walls. The bottom line is that while a Zillow Zestimate or any other AVM model may give you a 20,000-foot view of the general price range of a property, an appraisal performed by a live person provides a more focused and accurate estimate of the home’s value that can be used to make an informed loan or purchase decision.

Myth #3: The appraisal always comes in at the contract price

I have heard this observation from others and would like to address it as a myth because it does not always happen. True, there are many occasions when they do align, however, let me explain why.

During the appraisal process, the appraiser is collecting and analyzing market data to arrive at an educated opinion of value. Some of the data points studied include results from the three approaches to value.

These approaches included the cost, sales, and income approach to value. It will depend on the property itself as to which approach is the most appropriate, however, there are potentially three data points that can be reconciled into a final opinion of value.

Most people are aware of the sales comparison approach where appraisers consider the “comps” in the area. At a minimum appraisers are tasked with analyzing three closed sales, however, it usually turns out that more sales are included in addition to active and pending sales.

In a sales transaction, there is one additional piece of data and that is the contract price. This is also something that the appraiser must consider because it reflects the back-and-forth negotiations between buyer and seller.

The bottom line is that if the contract price is in close alignment with the other approaches to value, especially the sales comparison approach, then this provides validation that it is a reliable indicator of market value for the property so the appraiser will reconcile the appraisal at the contract price.

As I noted previously, this does not always happen, however, when it does it is usually for the reasons I have stated.

Myth #4: The appraiser is working for the buyer

During a home purchase transaction the relationship between appraiser, buyer, and lender is sometimes confusing. Many times the buyer will believe that since the appraiser is appraising the house they are buying that the appraiser is working for them, however, this is not the case.

In reality, the lender is the appraiser’s client. The appraiser is hired by the lender to determine the market value of the collateral they are taking for the loan.

Because of this relationship, there are several things that’s important for the buyer to be aware of. The appraiser is not allowed to discuss the results of the appraisal with the buyer unless the lender gives them permission to do so.

Myth #5: Cost always equals value

A myth that seems to get a lot of homeowners in trouble is believing that they will get a 100% return on the cost of their home improvement investment. Just because you’ve added $50,000 in landscaping does not mean that the value of your home will increase by $50,000.

The amount of value that your home will increase by is based on the market’s reaction to the improvements. In other words, how much contributory value do the improvements add?

The contributory value, of course, is a measure of how much a certain feature contributes to the overall value. It does not always equal cost and can be more or less depending on how much value buyers place on it.

The appraiser’s job is to study the market to see what the contributory value of an improvement is. One way that homeowners can proactively seek to make an informed decision and get a better return on their investment is to get a “subject-to” appraisal to determine the value of their home after they make improvements. They can then compare the cost of the improvements with the estimated value of home after the improvements are made.

Myth #6: Comps must be within one mile of the subject property

This popular myth causes a lot of problems for real estate agents, and let me explain why. Most agents believe that you cannot use sales that are further away than one mile from the subject property.

Using sales from the subject’s neighborhood is preferable, however, if none are available you might need to look outside of the immediate neighborhood in a competitive market area. Fannie Mae gives appraisers permission to go beyond a one-mile radius as long as they explain why.

Keep in mind, this is more common in rural areas where sales do not occur as often or nearby and it sometimes becomes necessary to expand your search parameters. On the other hand, if your property is in an urban or suburban setting it’s most likely that there are sufficient sales to use when pricing a property.

In most situations, I would not recommend going outside of the immediate neighborhood in an urban or suburban setting especially if there are sufficient nearby sales. I should mention that while Fannie Mae allows using sales further away than one mile some banks may have their own requirements that may prohibit more distant sales so that is something to keep in mind.

Myth #7: Agents and appraisers cannot talk

There is often confusion about the rules governing communication between real estate agents and appraisers. Many mistakenly believe that no interaction is allowed or are unaware that it is unethical to suggest a desired appraisal value to an appraiser. These rules aim to ensure appraisers conduct independent and impartial appraisals, especially for mortgage lending purposes.

Real estate agents can provide appraisers with comparable sales data, but it must be carefully selected. Some appraisers may hesitate to accept comps from agents, fearing they are being steered toward a specific value. To avoid this, agents should use the same criteria appraisers do when selecting true comparables. Appraisers, in turn, should remain open to considering this data, as it can help ensure a thorough and accurate appraisal process.

Agents should share information about home improvements, neighborhood amenities, and unique features upfront as this information helps the appraiser understand what went into their pricing strategy. Renovations, such as kitchen or bathroom updates, and hidden upgrades, like high-end materials or bonus rooms, can significantly impact a home’s value. Additionally, neighborhood factors, such as proximity to schools or other desirable amenities, should be communicated.

However, agents should not try to influence the appraiser’s conclusion by suggesting a specific value or commenting on how the appraisal should align with the sales contract. If an appraisal comes in low, agents must use the proper protocol by addressing concerns with the lender in writing rather than with the appraiser. Providing additional relevant data after the appraisal is finished can help clarify discrepancies, but it is always better to supply the information upfront before the appraisal is completed.

Myth #8: Appraisals and home inspections are the same

I get calls quite often from people who need a home inspection. They mistakenly believe that appraisals and home inspections are the same, however as you might have guessed, they are not.

An appraisal addresses the value of a property. While the appraiser takes into consideration the condition of the property it is not to the same degree as that of a home inspector.

An appraiser will report any readily observable signs of damage or deferred maintenance. They will not, however, do an invasive type of inspection where they enter the walls or test the electrical, plumbing, or structural system of the house.

On the other hand, a home inspection is more concerned with the condition of the property rather than what it is worth. A home inspector is trained to extensively test the main systems of the house and report on their condition. If there is anything beyond their expertise they will recommend an inspection by a licensed professional.

As noted, the main differences between these two critical components of the home buying process are condition with the home inspection and value with the appraisal, it’s as simple as that.

Myth #9: Assessed value will equal market value

I get asked frequently if the tax assessment value of a home will be the same as the appraisal value. The short answer is maybe. There is no hard and fast rule that says the two will be the same so you should never use the assessed value when pricing your home to sell.

I know that sounds like a cop-out but there is a big difference between the two that I would like to point out. The assessment value is based on an effective date of October 1st of the date it was assessed and in Alabama, one-quarter of the county is assessed every year which means every property is re-assessed every four years.

The reason this is important is because unless your property was recently assessed the tax value may be several years old. In contrast, the market value arrived at during an appraisal by an independent appraiser has an effective date as of the date they are at your property.

So if you want an accurate snapshot of the current value of your home, never rely on the assessment. You will get the most accurate value by hiring an independent appraiser who will analyze the most recent sales and market trends.

Myth #10: The “new” appraisal methods are better than the old

If you keep up to date with the news about the appraisal profession you will know that the trend is to move away from traditional appraisals. We keep hearing more and more about appraisal waivers and hybrid appraisals.

While there is always room for improvement in everything that we do we must weigh the costs and benefits of each new change. Two of the biggest reasons that appraisal waivers and hybrid appraisals are being discussed is to save time and money.

While these are legitimate reasons to explore alternative methods they cannot be the driving force, especially when the accuracy of the appraisal and the integrity of the process is threatened. So far it does not look like these methods offer a better alternative due in part to unintended consequences they create.

Appraisal waivers are designed to bypass the need for a traditional appraisal, but skipping this critical step undermines an essential layer of checks and balances in the lending process. This can result in property valuation errors, leading to over or under-lending, and potentially increasing the risk of defaults or financial losses.

Hybrid appraisals combine the expertise of the appraiser to analyze the market using data collected by a third party. These third-party property data collectors (PDCs) are often unlicensed and some have even been found to have criminal records.

This wild west attitude with data collectors can diminish confidence in the appraisal process. The public may question the accuracy of appraisals due to potential inaccuracies from using unlicensed or inexperienced property data collectors.

Traditional appraisals represent the gold standard in the valuation profession and should serve as the benchmark against which all other methods are evaluated. So far appraisal waivers and hybrid appraisals have not met the standard.

Conclusion

I’ve covered some the top appraisal myths that I’ve been thinking about lately, however, there are others that I may cover in future posts. Do you have any questions about these 10 real estate appraisal myths? Please leave a comment below and as always thanks for reading.

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