Understanding the Basics of Real Estate Appraisal: Part 1-A Guide for New Agents

A New Agent’s Guide to the Basics of Real Estate Appraisal

Starting out as a real estate agent can be overwhelming. You’re juggling paperwork, client expectations, and the intricacies of the market. One area that often causes confusion is the appraisal process. Understanding this process is crucial, as it can significantly impact your transactions. In this post, the first in a multi-part series, I’ll break it down in simple terms, using real-life examples to help you navigate it confidently and be a trusted resource for your clients.

What Is a Real Estate Appraisal, and Why Does It Matter?

An appraisal is an unbiased professional opinion of a home’s value. It’s a critical part of the home-buying process because lenders require it to ensure the property is worth the loan amount they’re offering. But appraisals aren’t just for lenders—they help buyers avoid overpaying for a home and assist sellers in setting a realistic asking price.

For example, imagine a buyer is excited to purchase a property, but the appraisal comes back much lower than the offer price. If the buyer is unable to increase their down payment to make up for the difference, the sale could fall apart. When a seller sets their price too high without understanding the market or appraisal process, they risk wasting time on a listing that will likely not sell, which can lead to price reductions later on.

Understanding the appraisal process allows you to:

• Set realistic expectations for your clients about the value of their property or the property they are interested in.
• Anticipate potential issues that could arise during the transaction, like a low appraisal.
• Communicate effectively with all parties involved—buyer, seller, lender, and appraiser.

Who Orders the Appraisal, and Who Owns the Report?

Typically, the lender orders the appraisal to protect their investment. The report is for the lender’s use and is only shared with the buyer but not the seller. As an agent, it’s important to understand that the report belongs to the lender, but buyers can receive a copy once it’s complete. The seller typically never receives the report. This is something to keep in mind when you’re managing client expectations.

Let’s say a buyer is anxiously waiting for the appraisal report to come back. As an agent, it’s helpful to explain that the report isn’t automatically shared with the buyer. Instead, they will need to contact the lender to request a copy. This prevents confusion or frustration if your clients expect immediate access to the appraisal details.

Key Factors Influencing Appraisal Value

Appraisers consider various factors when determining a property’s value. As an agent, understanding what influences an appraisal allows you to guide your clients more effectively. These are some of the main factors appraisers consider:

1. Comparable Sales (Comps): Appraisers rely heavily on comparable sales—recent sales of similar properties in the area. For instance, if you’re helping a client price a home, you can point out homes with similar features, size, and location as your comparables. If one of these comps sold recently for less than expected, it could affect your client’s sale price.
2. Property Condition: A home that’s well-maintained, with updated fixtures and flooring or a newly renovated kitchen or bathrooms, will likely appraise higher than one that needs significant repairs. Buyer’s will look at the condition of a home they want to buy and then the costs to make repairs or update it, and factor this into their offer.
3. Location: Proximity to schools, parks, shopping, and public transportation can influence a home’s value. A home in a highly desirable neighborhood with good schools and amenities is more likely to appraise higher than a comparable home in a less desirable area.
4. Market Trends: Current real estate market conditions, such as supply and demand, interest rates, and overall market activity, can also affect appraised value. For example, if homes in the area are appreciating rapidly, the appraisal may come in higher than expected. The opposite is also true, unfortunately.

Tips for Working with Appraisers

Building a positive relationship with appraisers can facilitate smoother transactions and better results for your clients. Here are some tips for working with appraisers:

• Provide Accurate Information: Ensure that all property details are correct and up-to-date. Any missing information, like square footage or property features, can lead to errors in the appraisal. I often run into square footage discrepancies during appraisals. When the square footage is overstated in the listing, the list price can be too high, and the appraisal may come in lower because the property was overpriced. If the square footage was understated, it will probably appraise, however, the sellers may be losing money.
• Highlight Key Features: Point out any recent upgrades or unique features that may add value. For example, if a property has a renovated basement or a newly installed roof or heating and cooling system, be sure the appraiser is aware. This can help ensure that these factors are considered in the final valuation.
• Respect Their Independence: Appraisers are impartial and must adhere to ethical standards. Avoid pressuring them to come up with a specific value. While it’s fine to provide relevant information about the home, always remember that the appraiser’s job is to provide an objective opinion of value.
• Understand the Appraisal Report: After receiving the appraisal report, review it carefully. If there are discrepancies or areas of concern, address them with the lender. Because the appraisal is completed, you can no longer discuss it with the appraiser.

What Happens If the Appraisal Comes Back Lower Than Expected?

A low appraisal can be challenging, but there are steps you can take to handle it smoothly:

1. Negotiate with the Seller: If the appraisal comes in lower than the offer price, you can negotiate with the seller to see if they’re willing to lower the price to match the appraisal. This is often the easiest solution, but it depends on the seller’s situation.
2. Challenge the Appraisal: If you believe there are errors, you can request a reconsideration or challenge the appraisal. You’ll need to provide supporting evidence, such as more accurate comparables or documentation of property upgrades. In addition, there may be mistakes in the subject property description that may have resulted in a lower value.
3. Consider Other Options: If the seller won’t budge on the price, you can explore other financing options. For example, the buyer may be able to increase their down payment to cover the difference. In recent times, banks and AMCs have started using AVMs and Hybrid Appraisals, which can generate unreliable results. In situations like this, a second full appraisal performed by a certified appraiser may be the logical choice.

Understanding how to manage a low appraisal will help you guide your clients through this potential roadblock. For instance, you might say, “In cases like this, we can work with the lender to request a second appraisal or explore options to keep the deal moving forward.”

Common Misconceptions About Real Estate Appraisals

Understanding and addressing common myths about appraisals can help you better educate your clients and avoid potential pitfalls. Here are some prevalent misconceptions:

Myth 1: All Real Estate Appraisers Are the Same

Not all appraisers are created equal. They vary based on their education, experience, and specialization. In Alabama, appraisers must be certified by the state, and those with more experience or specialized training may provide more accurate and reliable appraisals.

Myth 2: Appraisals Are the Same as Home Inspections

While both appraisals and inspections assess a property’s condition, they serve different purposes. An appraisal determines the property’s market value, while an inspection identifies potential issues or repairs needed. An appraiser is typically limited to what is readily visible, however, the home inspector is required to do more intrusive inspections to check the various systems of the house like the HVAC, electrical, plumbing, and structural systems.

Myth 3: The Appraisal Always Matches the Contract Price

It’s a common belief that the appraisal will always match the agreed-upon contract price. However, appraisers base their evaluations on comparable sales and property conditions, which may result in a different value.

Myth 4: Assessed Value Equals Market Value

Assessed value is used for tax purposes and may not reflect the current market value of a property. Relying solely on assessed value can lead to mispricing a property.

Myth 5: Appraisers Use a Standard Formula for All Properties

Appraisers consider various factors, including location, condition, and recent sales, when determining a property’s value. There isn’t a one-size-fits-all formula.

Conclusion: Empowering Yourself with Appraisal Knowledge

As a new agent, having a solid understanding of the appraisal process will set you apart. It allows you to:

• Educate your clients, setting realistic expectations from the beginning.
• Navigate challenges like low appraisals or price negotiations.
• Enhance your credibility as a knowledgeable agent who can handle the process with confidence.

You don’t need to be an expert appraiser, but understanding the basics of appraisals and knowing how to communicate effectively with appraisers and clients will help you build trust and establish yourself as an expert in the field. Stay tuned for next week’s post, where I’ll explore the appraisal process and what appraisers look for.

If I can answer any questions, feel free to contact me, and as always, thanks for reading.

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