What is an appraisal?

I recently came across this great graphic by Title Source that goes through the home appraisal process and the appraisal basics. It briefly discusses what an appraisal is, why it is necessary, what appraisals are based on, what homebuyers need to know, appraisal myths and truths, etc. In the coming months, I will be unpacking each of these topics and going into more detail about each of the items shown in the “flowchart” to “pull back the curtain” in an effort to educate the consumer on the appraisal process and what they need to be aware of.

"An unbiased, professional opinion of value"

In the graphic they define the word "appraisal" as: "An unbiased professional opinion of value." For this first post in the series, let’s take a closer look at what those first three words really mean.

The word "unbiased" is pretty straightforward but what does it mean in relation to being a real estate appraiser? Essentially, it means that an appraiser is charged with being an independent party that cannot advocate for either side of the transaction. Appraisers should never advocate for a client's objective. Often a homeowner is hoping for a certain outcome. For example, if they are applying for a mortgage refinance or Home Equity Loan, they are wanting a higher appraised value. But if they are appealing their property taxes or settling an estate and planning on buying out the others in the estate, they most likely want a lower value. Another good example of this is when the intended use is for a divorce appraisal and we are asked to determine market value for a property that is owned by two people going through a divorce. Just because one spouse hires an appraiser doesn't mean that the appraiser is an advocate for their client. No, an appraiser's role is to provide an unbiased, well-supported opinion of value. This one word alone is an important one that separates us as appraisers from every other person involved in the transaction

The word "professional" could have easily been omitted from their definition of appraisal but it's telling that it was included. One reason is that all appraisers must be licensed and adhere to a professional set of Standards and Ethics as detailed by USPAP. We must take extensive amounts of appraisal coursework and also acquire a significant number of hours working on appraisal reports before becoming a licensed and certified appraiser. In order to maintain our license, we must also take a minimum number of hours of continuing education every 2 years. All of this means that appraisers are continually engaging with other appraisers and keeping abreast of the latest trends and changes in the appraisal profession. These experience and education requirements in combination with USPAP holding appraisers to a uniform standards and ethics, gives appraisers the tools and expertise in valuation methods and best practices. It is for these reasons that I believe the word “professional” is an important one.

Finally, we get to the word "opinion". While there is a lot of science involved and standard accepted methodology, there is also an art to appraising and the results are often subjective. Two appraiser can be hired to appraise the same property and may come to different value conclusions. Now, if they are both good appraisers with a strong knowledge of the market area and have well-researched and supported opinions of value, then the two opinions of value should be fairly close (typically within 5%). Real estate markets are imperfect due to many factors including different buyer/seller motivations and we cannot always account for some of these unknowns. However, we are trained to analyze all market data including interviewing market participants and use this information to provide an opinion of value that is indicative of the most probable sales price of a property.

So to summarize, you can reach out to any number of people to get an opinion of what your home might be worth. Each person is going to have an opinion based on, at the very least, their own experience and possibly their own best interest. But an appraiser follows a standardized set of best practices, analysis, and methodology that leads to a professional opinion of value that is above-all unbiased and well supported.

THE HOME APPRAISAL PROCESS - What you need to know as the buyer

To see the full graphic to see other topics I will be covering click the button below.  For Real Estate Agents, this may be a useful tool to provide your buyers/sellers with as a brief overview of the process.

Real Estate and Price Per Square Foot

Appraiser vs. Home Inspector – What’s the Diff?

Often before a property is purchased using a loan from a mortgage company, it must be appraised and inspected. Many homeowners confuse the appraisal inspection and the home inspection and ask me what the difference is. Here are some of the main ways that appraisals and home inspections are different and also overlap.

Different End Goals: Value vs. Condition

The main thing to know is a real estate appraiser’s focus is on determining the value of the home and those factors that will influence that value. A Home Inspector’s main objective is determining the condition. The Home Inspector is tasked with determining the condition of the property in terms of structural soundness and quality/safety of electrical and plumbing systems. The Home Inspector has an obligation to be accurate in their assessment of a home’s condition but they also act as advocates for the buyer. Their job is to point out any deficiencies with the house such as outdated/unsafe wiring or obvious problems with the foundation so that their client (the buyer) can make an informed decision about whether to purchase the house, negotiate a lower contract price, or just walk away all together. See the graphic below for many of the items a home inspector will be looking at (Source: www.gqre.com).

While an appraiser’s inspection of the property may take into consideration many of the things a Home Inspector looks at, his/her ultimate goal is to provide an opinion of value. The appraiser’s job is to provide their client (the lender) an accurate, well-supported, unbiased opinion of value. This usually includes commentary on the condition of the property since that is tied to value. For example, a 1960’s ranch home in original condition will most likely have a lower value than a 1960’s ranch home in the same neighborhood that has an updated kitchen and bathrooms. The appraiser’s job is to give the bank their opinion of market value (I go into this in more detail on a prior post - Market Value: Probable vs. Possible) which helps them determine if the mortgage be a good, sound investment for the bank.

Appraisal Inspection vs. Home Inspection

So how will you tell the Appraiser and the Home Inspector apart when they come to your home? Probably they’ll introduce themselves as either the Appraiser or the Home Inspector. Just kidding!

The appraiser’s site visit will usually take around 30 minutes and they will measure your house and look at all of the rooms including the basement. They will be noting the quality and condition of the finishes, the layout, bed and bath count, etc. They will take pictures of each room to include in the appraisal report. In some cases, like for an FHA loan, the appraiser may inspect crawl spaces and attics or test the basic appliances. But he’s probably not going to crawl under the house to inspect the foundation or get on your roof and walk around looking for leaks.

Appraisers try to look at the property through the eyes of the most probable buyer for that particular property – not only which features and attributes they find desirable, but also to what extent would the typical buyers be “inspecting” the home? A more simplified way to look at it is to ask yourself: “If I were looking to purchase this house, what are the things I would look at and what things would I hire someone with professional experience to check?” You may open a cabinet or two, look at the ceilings for leaks, take a look at the mechanicals to see if they are newer or may need replaced soon. But in my experience, very few buyers will be going into crawl spaces and bringing their ladders to get on the roof. They are mainly interested in the functionality of the house such as how many bedroom and bathrooms, whether they like the layout of the floorplan, etc.  Here is a great video from a Portland appraiser, Gary Kristensen, that shows you what you can expect when an appraiser visits.

A Home Inspector will really get into the bones of the home. They will get on the roof, get into the crawl space, and analyze the structural integrity. A good Home Inspector will be able to find possible issues that the Appraiser may not such as termites, faulty electrical wiring, plumbing that is not up to code, structural issues, leaky roof, mold, etc. Now that I’ve scared you with all the things that could be wrong with a house you’re looking to purchase (!), I highly recommend that if you are buying a home you hire a licensed Home Inspector to complete a full home inspection because they will be able to tell you things about the home that the typical appraiser is not going to. If you don’t know a good home inspector in Chicagoland, we recommend Inspectrum. Click here for their website and contact info.


If you have any questions, please don't hesitate to call us at (847) 863-5776. We specialize in appraisals for estates, divorce, pre-listings, bankruptcy, etc.

Chicago Housing Styles

 

Chicago style bungalowReal estate agents and appraisers alike often struggle to define the architectural style for unusual or unique properties. Have you ever gotten a new listing, took one look and started scratching your head and asking yourself how you are going to describe this to prospective clients?

Even more basic properties can present a conundrum when they nod to more than one typical style. The web offers some great resources to both educate yourself on architectural styles and help make a decision once you start completing the listing form on the MLS. The National Association of Realtor’s website offers a good starting point (http://realtormag.realtor.org/home-and-design/guide-residential-styles).    This article covers common styles across the country but since many architectural designs end up including a number of different styles, it’s good to know your Craftsman from your Colonial. Sometimes it’s just a little bit of detail that turns a standard Cape Cod into a Tudor.

Chicago housing styles via Big Shoulders Realty

Chicago housing styles via Big Shoulders Realty

Fortunately, Chicago definitely has some set, easily identifiable housing types.  Big Shoulders Realty, a boutique brokerage firm in Chicago, has an excellent page on their website that provides brief histories and descriptions of housing styles common to Chicago that can be helpful when describing a property on MLS (click on the image above to go to the page).  Then click on the housing style and you are taken to a page that also shows you actual houses in Chicago that are of that style.  It really is the best resource online I have found for the Chicago market (it should be called “Chicago Housing Styles for Dummies”).

But what do you do when you have a more recently constructed property? How do you avoid using the catch-alls “Traditional” and “Contemporary”?  Really, I’m asking.  Feel free to comment below!  General consensus has it that “contemporary” means “of this time” or moment. Something funky, modern-looking or new could fall under that category. For a property where “traditional” seems like the only option, maybe pull out the most prominent feature, like a turret or full front porch or examine the roof line for any elements that point in one stylistic direction or the other.

Rowe Appraisal Group specializes in “non-lender” appraisals and we complete pre-listings appraisals for real estate agents and homeowners all the time.  Don’t hesitate to reach out to us if you ever have any questions.  You can reach us at (847) 863-5776 or email us at roweappraisalgroup@gmail.com.

Land Value: Surplus vs. Excess

I recently came across this interesting animated GIF from an article from RealtorMag regarding land values over the last 40 years.  It followed the overall housing market by peaking in 2006 and bottoming in 2011.  When thinking about land value it is important to understand a fundamental concept of surplus land vs. excess land.  Jonathan Montgomery also wrote an excellent post with some additional information on this topic you can read here.


EXCESS LAND is the portion of the lot that is not necessary to meet the existing zoning requirements AND could possibly be sub-divided and sold off as a separate parcel.  
SURPLUS LAND is not large enough to be separated from the existing parcel and therefore, does not have as much value as excess land.


The trick I was taught to remember this is excess land is excellent.  Let's look at the following two slides below from a recent class I took from the Hagar Institute (which I highly recommend for all appraisers).

Source: How to Support and Prove Your Adjustments by Richard Hagar 

Source: How to Support and Prove Your Adjustments by Richard Hagar 

In this example, a 3000 sq. ft. lot is valued at only $3 per sq. ft. as it is considered unbuildable and has minimal utility.  Once you get to 5000 sq. ft. the value per sq. ft. increases to $40 per sq. ft. Therefore, a 3000 sq. ft. lot would have a market value of around $9000, while a 5000 sq. ft. lot would have a market value of $200,000.  

Remember that when appraisers are analyzing land values, we are NOT making adjustments on the total size, but instead the incremental change in size.  This same theory can be applied to many other features of real estate as well (GLA, first bed or bath, first 50' of water frontage, etc.)  If you have any questions please feel free to call me at (847) 863-5776 or leave your question or comment below. 

Tips for Real Estate Agents to Avoid a Bad Appraisal

realtor tip- How to avoid a bad appraisalAs a real estate agent, it’s possible you have been the victim of an appraisal that came in below the contract price. Then when you saw one or two of the sales the appraiser used, you were upset.  You wanted to scream, “But that house has X, Y, and Z differences!” In many of those cases, it’s possible that the market just didn’t support the contract price, while in other cases, it was the result of a bad appraisal.  Here are some tips to help you prevent the latter from happening.

As experienced real estate appraisers, some of us like to think we know it all; we know everything about every street of every one of Chicago’s 200+ neighborhoods. But the truth is, we don’t. As certified licensed appraisers, we are required to be geographically competent in the areas we work. However, it is impossible to know the intricacies of every street and neighborhood in Chicago and the surrounding suburbs. A truly good appraiser makes use of all resources available to ensure we are giving our clients the most thorough, accurate appraisal possible, and that includes reaching out to real estate agents and accepting/analyzing any sales you provide.

There is a myth that real estate agents can’t talk to appraisers. Appraisers are by law required to develop a well-supported, unbiased opinion of value. We must be independent, impartial, and objective and cannot be an advocate for either side of the transaction. As long you, the real estate agent, are not trying to influence or pressure the appraiser to arrive at a particular value, we should not only welcome a conversation, but seek it out. I want as much information as possible, and if the agent feels it would be helpful to provide me with some comparable sales to consider, I am happy to look at them. Does that mean I will just take the three sales you give me and use them in my report without completing my own due diligence? Of course not. When I’m provided with sales, that is exactly what they are, sales. They do not become comparable sales until the appraiser has analyzed them and decided that they are the most similar sales in the neighborhood and are the best indicators of market value.

It is most valuable when the agent gives me two or three truly comparable sales from the MLS with notes pointing out things that may not be easily observed just by looking at the listing sheet. It is less valuable when I’m given a stack of MLS listings by the agent and it appears that the only search criterion they used was all properties that sold above the contract price of the subject. A thorough appraisal should will always include an exhaustive search of all sales and listings in the subject’s market area and only those that are most similar to the subject should be selected.

In some cases, it is the most helpful when I am provided information on a sale that appears to be similar to the subject, but sold below the subject’s contract price (believe me, we are going to find it anyway and it is best to explain the situation up front). Here are a few situations I have run into in the past when a sale appeared to be very similar to the subject but there were certain issues that could have been easily overlooked or were not properly communicated on the MLS:

EXAMPLES OF DETAILS TO POINT OUT TO THE APPRAISER

  • A sale was listed as a 4 bedroom, but 2 of them were in the basement and represented that way on the MLS listing.
  • The house was located on the rear of the lot and it sold lower because it lacked a backyard with privacy.
  • The only bath that a Tudor style home had was on the first floor while all three bedrooms were on the second and therefore functionally undesirable to most buyers.
  • The home’s basement had flooded after being listed (therefore was not mentioned on the MLS listing sheet) and the buyer negotiated a lower price to factor in the cost of rehabbing the basement.
  • Homes on the west side of street A are selling at a premium to the east side because they back to other single family homes while the east side backs to 2-4 flat buildings (as was the case on a recent appraisal in the Lakewood Balmoral neighborhood).
  • Sales on the south side of the Isabella Street go Evanston High School and those on the north go to New Trier (significant difference in value).
  • The subject is a unique house for the area with no recent sales of similar houses on the MLS, but there was a similar home that sold FSBO recently (we can typically verify those through various sources but may not have initially found it on our own if it was not listed on the MLS)

Many of you also often specialize in a particular neighborhood and can let us know these things. There are endless of examples that I could give of situations where the real estate agent made me aware of something I otherwise may not have noticed or known.

As real estate agents, you have an advantage over appraisers with regards to access to the buyer/seller’s thought process. You are meeting buyers and sellers every week and you get to hear what buyers think and how they are making their decisions. You have walked through or toured the interior of many of the sales and listings in the neighborhood and have heard feedback from your clients (aka “The Market”). This can be very valuable information for appraisers as we are trying to determine “Market Value”.

It is our job to reach out to you. Unfortunately, we are typically given no more than 48 hours from the time of the inspection to have the completed report submitted to the client. That means if we call and leave a message letting you know we have a question, we really do need to hear back from you that day or the next. It is not uncommon for me to get a call a week later when I have already signed and submitted the report. It is much easier to edit a report with new information BEFORE it is signed and submitted to the lender.  We know you are busy and your time is just as valuable as ours, which is why I make sure to let those that do take a couple of minutes with me on the phone, that they are appreciated.

Appraisers are trained in many different techniques to analyze the market but similar to real estate agents, not all appraisers were created equal.  Some are willing to go the extra mile, while some may not.  And you as the real estate agent can be a really good information resource for those appraisers willing to reach out and those agents willing to share their knowledge.  By pointing out some of the issues listed above, you could end up avoiding an “appraisal problem” in the future.

If any of you have any appraisal questions on this or any topic, please feel free to leave a comment or call me directly at (847) 863-5776.

And a HUGE thank you to all the agents that have taken my calls over the years!

 

Do you need help in challenging a bad appraisal?  I have provided two different templates below that you can use to do so effectively and efficiently.

 

Template 1 for Challenging a bad appraisal
Template 2 for Challenging a bad appraisal

 

 

Park Ridge Single Family Housing Market

Park Ridge Home valuesThere has been a lot of discussion in the national news about a cooling housing market.  As a real estate appraiser with my office in Park Ridge Illinois, I’m providing a little insight into how we can dig deeper into the local market to get an idea of which direction home prices may be headed in the near term.   I looked at several different metrics for single family homes in Park Ridge (charts attached are interactive).

 film Sandy Wexler 2017

 film Sandy Wexler 2017

Year-Over-Year Median Sales Price (Rolling 12 month average) – As you can see below the trend is still headed higher (12.6% increase year-over-year)

 film Sandy Wexler 2017

 film Sandy Wexler 2017

Months supply of inventory – Supply is down to 4.1 months of inventory (down 13.6% year-over-year)

 film Sandy Wexler 2017

Average Market Time – The average time it takes to sell a house is significantly less (down 41% year-over-year)

 film Sandy Wexler 2017

 film Sandy Wexler 2017

List to Sales Price Ratio – The amount the home sells for vs. what it was most recently listed for is also improving (approximately 96%)

 film Sandy Wexler 2017

 film Sandy Wexler 2017

 film Sandy Wexler 2017

Overall, these are all positive signs, but they are statistics that are in the “rear view mirror”.  As I analyze the market to help homeowners determine an appropriate  listing price for their home, (click here for more info on that process) I analyze forward looking indicators in an effort to be aware of what may be in store for the market.

After noting the current median sales price of $394,000 and average sales price of $450,000, I compared those two data points to a more forward looking data point, pending sales.  The current median list price of the 82 detached homes currently under contract is $439,000 and the average is $498,000.  Those are a combined average of 11% higher than what has sold over the last 12 months.  As we know with the exception of a few hot markets, homes very seldom sell at list price.  Over the last 12 months, the list to sales price ratio is approximately 96% (see chart above).  Therefore, once the 4% is removed from the pending sale to anticipate the final sales price, there is still  a projected increase of 6.6% over the current 12 month sales data.

In summary, while the overall rate of increase in sales prices in Park Ridge appear to be slowing, the trend appears to be still pointing up in the near term.  The majority of these pending sales should close in the next 30-60 days, so it looks like Park Ridge should have some much needed momentum heading into the seasonally slower fall and winter months.   For more Park Ridge charts check out our Park Ridge Page.  If you have any questions, please feel free to call us anytime at (847) 863-5776.

 film Sandy Wexler 2017

The Secret to a Stress-Free Appraisal Experience

Whether you are buying or selling a home, it can be a very stressful time and one of my goals is to provide a service that makes the experience as stress-free and transparent as possible. About a year ago, I received a phone call from a homeowner in the Edison Park neighborhood of Chicago who wanted to get an appraisal to help them determine a price to list their home. During the conversation he asked, “Why should I hire you?” It caught me off guard because usually the first question I get is, “How much do you charge for an appraisal?” (I won’t get into that here, but I can promise you that it is not a good idea to hire your appraiser based solely on fee. See my blog article, "The Cheapest Appraiser", for the reasons why.) His question really made me think about what separates me from other appraisers in my market area. I started thinking about the feedback I most often get from clients and what’s most important to me when it comes to how other people perceive my company.

I think it is important to state that there are certain fundamental characteristics that every good appraiser should have (ie. experience, local knowledge, education, attention to detail, standards and ethics, etc). While I possess all of those characteristics, I know based on what my clients have said time and time again that I provide something else that is invaluable to them. When I’m hired by a homeowner, most of time they are looking to either determine a price to list their home (FSBO or just needing a second opinion from an unbiased third party other than their Realtor) or determine fair market value when purchasing a home to make sure they are not overpaying. Most appraisers will come out and measure your home, take some pictures, and ask a few questions. Then several days later you get an email with a PDF of an appraisal report. You‘re anxious to see what value the appraiser has come up with and you open the report only to find that you have no idea what you’re looking at. Most appraisal reports are 30+ pages in length and filled with appraisal jargon and lending terms that the typical homeowner just doesn’t understand.

That's why it is important to take a different approach to these types of “non-lender” assignments. All of my appraisals involve two Consultations (one during the initial inspection and another after the appraisal report has been completed). During the first consultation I interview the homeowner to find out what their expectations are and explain how the appraisal process works. We talk about the house they are buying or selling, and I point out any items of concern I see during the inspection. Once the report has been completed, I typically have the second consultation in which I come back to the house and we go over the report together to discuss the following:

  • I explain how the report is laid out and where to find the most important information.
  • We go through the charts and graphs that I have added to the report and I explain the current market conditions and property value trends in their neighborhood and how that affected my value conclusion. These charts not only show an overall view of the median sales price trends, but also give an indication of of the amount of housing supply on the market. I explain what an undersupply or oversupply of housing stock could mean for the value of their home.
  • We go through the sales I used and I point out the differences in condition or quality of construction and which features are more desirable and why. I then show them the listings in the area that they would be competing against and what that means for their property. We also go over where these comparables are located on the map and discuss any location adjustments that were deemed necessary.
  • And maybe most importantly, I ask them if they have any questions. As you already know, buying or selling a home can be a stressful proposition, and I want to make sure that the appraisal/valuation portion of the process is as stress-free and easily understood as possible.

This is the portion of the appraisal process that my clients appreciate the most. By taking that extra time to explain the report and answer any and all of their questions, I ensure that they are satisfied. I want to make sure that the appraisal/valuation portion of the process is as stress-free and easily understood as possible. In working with homeowners, I have found that this is my favorite part of the business. It really allows me to help through this process is an easily understood way. This is a much different world than the lender/refinance world where rules and regulations get in the way of who you can talk to and what you can discuss. At a time when everyone is in a hurry to move on to the next job, I think it is important that you find someone who will take their time and make sure all of your questions have been answered.

Please feel free to email me or call me at (847) 863-5776 with any questions you might have.

Chicago Appraiser vs. Zillow

I recently read a really interesting blog article from an appraiser in Philadelphia titled “Zillow vs. The Coyle Group”.  In the article, Michael Coyle analyzes over 20 of their most recent appraisals and compares them to what Zillow says they are worth via it’s Zestimate.  With sites like these appearing to be gaining popularity with consumers over the last few years, I thought I would do my own analysis. Below are the results: Zillow final The results may surprise you, they did me. Read More

What You Need To Know About Your Divorce Appraisal

For many couples, the marital residence is the largest asset obtained during the marriage.  Whether you or your spouse wishes to retain the marital residence after the divorce, it is important that an accurate value is obtained for purposes of property division.  There are typically two options regarding the home.

  1. The property can be sold and the proceeds divided.
  2. If either party wants to remain in the home, they can pay a settlement to their spouse.

In either case, an appraisal is needed.  In scenario #1, an appraisal should be obtained to help determine a listing price in an effort to limit the time the house will be listed for sale and maximize the selling price.  In scenario #2, the judge will not make a ruling on the settlement or division of property without an appraisal by a certified real estate appraiser.  As to who is responsible for the appraisal fee remains at the discretion of an agreement between both parties or court ordered by the judge.

Read More