Whether you're buying a home with the help of a mortgage or refinancing your current home, at some point, the bank is going to ask for a professional opinion of the home's true value. Appraisals make sure the price you're paying for the property is appropriate for the home's location, condition and other features. Dozens of factors influence the value of a home. Some will push the appraisal figure upwards, while others have the potential to slash thousands off the value of the home.
Location decreases a home's appraisal value the most. This occurs due to the fact that most homes appraise within 20 percent of similar homes in the area.
How Do Appraisals Works?
A real estate appraisal is an estimate of the home's value, as certified by a licensed appraiser. The appraiser will do a walk-through of the property, noting anything which could affect the home's value. Since lenders instruct the appraiser, it's a hands-off process for home buyers and sellers.
While each lender will have its own requirements about what should and should not be included in the appraisal report, for the most part, appraisers follow Fannie Mae's Uniform Residential Appraisal Report for single-family homes. This ensures consistency between home valuations, regardless of the state you're in or who is underwriting your loan.
Generally, an appraiser will only be instructed after you've signed a purchase agreement for the home. The appraiser already knows the price you've agreed to pay or accept for the property, or the amount you're borrowing in the case of a refinance. His job is to figure out whether that price represents what the home is worth in the current real estate market.
What is the Appraiser Looking For?
Before he even visits the property, the appraiser will pull up some market data for similar homes (similar size and amenities) that have sold in your neighborhood within the last three to six months – the more recent the better. This is known as comparable data or comps. The appraiser uses this data to understand what homes are selling for in your area and establish a baseline valuation for the property.
Next, the appraiser visits your home and looks at the items that could impact the home's value. These include:
- The square footage of the property and overall lot size
- Number of bedrooms, bathrooms, garages and so on
Floor plan functionality –
whether you have a cohesive layout so the home is easy to move around and live in * Quality of construction
– modern materials tend to add to the home's appraisal value because they improve the overall safety and efficiency of the home* Condition of the property –
whether it needs major repairs Features that add value, such as heat and air, curb appeal, garage space, recent home renovations or a view Whether the home conforms to the neighborhood
a 1970's style home may lose value if it is situated in a historic neighborhood * Anything else that might raise or lower the home's value compared to the comparable data
That last category is important. Appraisals are more an art than a science and ultimately, the appraiser is looking to adjust the baseline valuation up or down depending on whether your home has value-adding or value-reducing features compared to other homes in the area. He will then assign an actual value to the house based on his findings.
Things That Can Hurt a House Appraisal: Bad Neighborhood
As you can see, a home appraisal has two sections: the property walk through and the market appraisal. Of these, the market appraisal has the biggest impact on value. Location is everything in real estate: no matter how nice your home is, it is never going to outrun a bad neighborhood. If the home is located in a deprived area with high crime rates, under-performing schools, vandalized properties and foreclosures, then no amount of renovation will raise the home's value above the neighborhood's natural price ceiling.
Where your home is positioned inside the neighborhood will also hold some weight. Properties located next to a junkyard, power lines, railways, a noise-polluting industrial plant or a busy street invariably will get a lower valuation than homes on a quiet street surrounded by parks and amenities.
Things That Can Hurt a House Appraisal: Real Estate Market
Obviously, the state of the real estate market has a massive influence on how your home is appraised. In a seller's market, there are lots of enthusiastic buyers and not enough homes to accommodate them all. This pushes prices up, so the appraised value will be higher. Conversely, homes appraised during a buyer's market may come out lower than you're expecting. This market is saturated with inventory that few buyers want to purchase, keeping prices low.
Things That Can Hurt a House Appraisal: Disheveled Properties
A property that's in poor condition is always going to be worth less than a property that's in pristine condition. That's because the new owner will have to spend money on renovations to bring the property up to standard. As a rule of thumb, the appraised value should come down by roughly the amount of money it will take to repair the defect, and perhaps a little more to cover the buyer's trouble.
When it comes to disheveled properties, we're not just talking about appraisal-required repairs like broken windows or a leaking roof:
Getting rid of a room, for example, by knocking down a wall to create one spacious room may seem desirable but it can knock thousands off the home's appraised value. The number of bedrooms is an important factor in the comps and eliminating any bedroom space will change the baseline comparable value.
Unusual colors on the outside of your home mean the value will take a hit because the home is not consistent with the rest of the neighborhood. The appraiser is not interested in your internal color scheme – though a vivid green living room could discourage potential buyers.
Messy landscaping. Messy, outdated, sparse or geographically inappropriate landscaping could torpedo the home's value. Appraisers must factor the landscaping into their opinion of value. If it falls short of neighborhood norms, then the appraisal will be downgraded accordingly.
Things That Can Hurt a House Appraisal: The Wrong Renovations
Some homeowners assume that spending $50,000 on a flashy new kitchen will raise the value of their home by $50,000 – yet certain renovations can actually make the home less valuable. Adding a pool, for instance, can decrease the home's appeal because buyers do not want the cost and hassle of maintenance. In fact, most renovation projects don't return as much as they cost, according to Remodeling Magazine's 2019 Cost Versus Value Report.
Location is by far the biggest factor in a home's value and the fact is, comparable homes in the same neighborhood usually appraise sell for around the same amount, regardless of high-end fixtures or expensive outdoor kitchens. According to a U.S. News report, most homes in the same subdivision sell within a 20 percent price range of each other – meaning comps carry far more weight than any glossy upgrade.
When it comes to home appraisal dos and don'ts, the best advice is to check out what's happening in the neighborhood. If the renovation is not a common feature of the community, then the investment is unlikely to improve the appraisal value.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.