When I talk to buyers and sellers, one of the most stressful – and misunderstood – parts of the real estate sales process is how appraisal figures are determined. The key to any property appraisal is the value of comparable listings, or “comps.” These are sales records of recently sold homes comparable to a property on the market which are used to give a more accurate picture of that property’s worth—something anyone interested in buying or selling property should know.
When first evaluating the worth of the home, the appraiser researches the available sales data in the area to determine if there are comparable home sales to use for developing an appraisal. (If a credible report cannot easily be made, the Uniform Standards of Professional Appraisal Practice (USPAP) requires appraisers reject the assignment.) When researching the comparable sales, appraisers start at the same place brokers do—the MLS, or multiple listing service. Although the MLS is now an online database available at sites like realtor.com or mls.com, the concept behind it dates back to the early 1900’s, when it was a term applied to the practice of real estate agents meeting together in conferences to trade information about homes for sale in order to better connect them with potential buyers. Now, the online database—which is available to licensed agents and brokers who pay a membership—is searchable by prices, neighborhood, household features, etc.
Along with the MLS, current home listings are also important for appraising. As an appraiser told me, “If I can find several similar active listings which are well below the subject’s contract price, there is going to be a problem.”
But an appraiser’s work isn’t all on the computer. A visit to the property is also essential. An appraiser studies the property’s location and condition, and they record updates and other areas where further updating would increase the value. They also sketch the house, paying special attention to the floor layout. While appraisers can look past a dirty house, they will certainly make note of the quality of the paint job and carpeting, as well as new kitchens and bathrooms, and neat landscaping.
Once the appraiser has everything in order, they turn in a report to the bank. This report includes important information like the floor plan, photos, and comparable sales. Appraisers have to include an active listing to show banks alternate properties available. But the bank may disagree with the appraisal. Banks use underwriters who review the appraisal and look for data to support or discredit the appraisal number. This can affect the mortgage amount. For example, a $500,000 sales price with 20% down yields a $400,000 mortgage. If the appraisal comes in at $490,000, the amount the lender can offer is $392,000 (80% of the $490,000).
However, homeowners can appeal the appraisal. What do they need? Comps! They should provide recent sales they feel are best-aligned to use as comparable to their home.
To further illustrate how an appraisal can impact a sale, consider something that happened to Real Estate Broker Jo-Ann Reilly from Coldwell Banker. “I was in contract for a condo sale with my buyer client. My client was aware that the condo was listed $30,000 above market value but still needed to purchase quickly. After contract signing, the appraisal came in $30,000 below the contract price. We found out the appraiser did a ‘drive by’ appraisal, which means he never went into the house. My client could not afford to put any more cash down and the seller refused to lower his price. The deal died!”
Suzan Zeolla is a Licensed Associate Real Estate Broker with Houlihan Lawrence in Briarcliff. She has over 20 years of real estate experience.