 My House is Worth What?Thursday, February 2, 2012 - Article by: Gil Barteau -
If you are a loan officer and have been in this business for more than five minutes, you have dealt with the frustrations of a soft housing market and homeowner's sometimes unrealistic valuation expectations. I am fortunate in that I live and originate loans in Texas. The housing market isn't exactly booming here, but I cannot imagine how tough it must be for homeowners desiring to refinance in the "sand" states, such as Nevada, Arizona, and Florida, where housing is still on life support. So, how does an appraiser determine a home's value? And why do so many homeowners believe their home is worth more than the appraisal? The bottom line for most residential appraisals is market value......simply the value the appraiser believes the "market" will pay for the property based on recent comparable sales, also known as the Sales Comparison Approach. There are other valuation methods, including Income Approach for rental properties and Cost Approach, but Sales Comparison is by far the most accurate and widely used valuation method. On the surface, a residential appraisal is fairly simple and straightforward. Find 3 to 6 recently sold properties that are similar to the subject property, average their sales prices, and the resulting number is the value the market will pay for the subject. Easy, right? Yes, until the devil shows up in those pesky details. How often are two properties exactly alike? And what about location? Market trends? Drive up appeal? Features? Additions? Amenities? View? And, even if two properties are exactly the same, no two sellers and no two buyers are the same. For example, homeowner A may be retiring in a few years and thinking about moving to a beach condo. He has all the time in the world to sell his house and may be willing to hold out indefinitely for top dollar. And homeowner B, in his theoretically identical house, may have been transferred to another city and needs to enroll his kids in school before the start of the semester. He is the more motivated seller and doesn't have time to hold out for the best price. Since the price that a seller gets for his comparable home becomes the market valuation used for determining your home's value, the motivation of sellers and buyers become ingredients in your home's valuation soup. Setting aside the differences between sellers and buyers for a moment, let's take a brief look at what makes up value in an appraisal. The appraiser first looks at all the pertinent information about the subject property - age, size, number of rooms, updates, location, features, etc. She then searches multiple listings and extracts between 3 and 6 sales that best compare to the subject. Sales must be recent, preferably within the past 6 months, and no more than one year. And they must be close, expecially in an urban or suburban setting. Eveyone knows neighborhoods have characterisitics,so comparabel sales from the same neighborhood have more meaning than from competing neighborhoods. Adjustments are then made for differences. For example, if the subject has a pool but Comp #1 that sold last month does not, the appraiser makes an objective, positive adjustment for the market value of a swimming pool. Likewise, if Comp #2 is on a larger lot, a negative adjustment is made. Once all adjustments are made, the adjusted values are averaged, resulting in the Sales Comparison Value of the subject. |
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