Understanding the Home Appraisal Process
Consumers are often confused by the home appraisal process. Often times they feel their home is worth much more than it is. Even when presented its neighboring comparables, and therefore, the appraised value doesn't make sense to them. It is imperative to know that appraisal guidelines are regulated and dictated by the lenders and the law. In most states, the lenders must disclose the purpose of the appraisal, as each situation carries its own set of rules.
In essence, lender guidelines force appraisers to put a fair market value on a home based upon comparable sales in the area where the home is located, as the home must be bracketed according to size and value. For example, there is no set amount associated with a great view, pool, spa, bathroom upgrades, etc. If a homeowner installs a custom pool that cost them $60,000, and the local marketplace supports the value of a pool at $18,000, that item will be bracketed as [$18,000] on the appraisal.
Upgrades can usually be estimated at full value in newer homes since they required investing additional money onto the cost of building the home. On the other hand, the amount invested in upgrading or remodeling an older home is rarely reflected in full in the final appraisal. The reason is the home had value in its original condition, and again, the value of the upgrades must be supported by comparable examples within the same marketplace.
These comparisons must be drawn from current market activity within the last six months. Some lenders may want to look at both closed and pending sales to see if there is any room for negotiation. This is a safeguard to prevent appraisers from over-valuing the home in question. It is further stated in the guidelines that appraisers can only place a value on homes that have closed escrow. However, when property values rapidly increase within a marketplace, appraisers are generally permitted to make concessions and put more weight on the evidence provided by comparisons to pending sales and listings. This allows for a "real time" appraisal.
Although there is no formal standard to speak of, most banks give the appraiser a 5% margin of error. If the file is reviewed and the appraiser is off by 8%, there is a good chance the value will be cut by the full 8%. It is in the best interest of both the appraiser and the homeowner not to push the value up higher than the market will support, otherwise the property evaluation may be exposed to a strict appraisal review.
As a realtor, I compare past sales and current listed properties to come up with best prevailing value. With basic math and a touch of packaging, we almost always hit our target. This of course is granting the the sellers are on board with my sensible calculations and inputs.