Real estate appraisers are crucial players in many home sales. Ordinarily, the mortgage provider hires the appraiser, after a purchase has been agreed on and a home loan has been applied for, to determine the value of the home and whether it makes sense for the lender to provide as much money as the buyer is asking for.
As an agent, you need to know what real estate appraisers look for when determining a home’s value. In many cases, you should hire an appraiser before the home goes on the market to help determine the asking price.
Pre-listing appraisals are becoming more common
Pre-listing appraisals give the seller a realistic idea of where their property should appraise at the time of listing. They also point out any areas of concern that may be found during an appraisal so the seller can address these issues upfront.
It is important to note that this same appraisal cannot be used should an offer be presented (even if the offer supports the appraisal and vice versa). Lending guidelines would require a new appraisal to be ordered. However, if the same appraiser did both reports (which is permissible), he or she may offer a discount.
The appraised home value drives the loan amount
“The appraised value of a home will drive the amount of money that a buyer can borrow to finance the home,” explains Michele Lerner, Washington, D.C.-based author of Homebuying: Tough Times, First Time, Any Time. The lender hires the appraiser, and the buyer pays the fee. As a selling agent, you can assist in getting your client the best possible offer and ensuring a stress-free appraisal by addressing certain items upfront.
“First,” says Lerner, “make the house available when the appraiser wants it. Second, make it look as good for the appraiser as you would for the buyer. If real estate appraisers see deferred maintenance, they’ll wonder what else hasn’t been maintained. The best agents prepare information on the work the seller has put into the home, or about the quality of the school district if that’s a factor.”
Karen J. Mann, president of Mann Appraisal (Discovery Bay, California) notes that disparities between the agreed-upon price and the appraised home value can sometimes break the deal. Thus, she advises selling agents to have the house appraised at the beginning of the process.
Comparables are a necessity when working with real estate appraisers
“I’ve gone to properties and found them priced much higher than the others in the neighborhood, and I would ask the agent, “What comparables did you use when you set the price? The agent would say, ‘I don’t need comparables’—but you do need them. You can’t invent value out of thin air and then expect the appraisal to work. If you’re asking a certain price, show the appraiser the documentation to show why it’s justified.”
“Once the appraiser understands how you’ve arrived at the price, she’ll usually know how to work with you. Smart agents hire an appraiser independently, prior to listing. Sometimes a seller is unrealistic about the price, and in that case, the agent can make the appraiser the bad guy. We don’t mind: it’s part of the business.”
Beware of overbidding and inflated home values
Mann notes that in today’s seller’s market, she sometimes sees overbidding, and in that case, the lender might not offer as big a loan as the buyer wants. In that case, either the sale price can be negotiated down, or the buyer can make a larger down payment—or the deal could collapse. That’s why a seller should work with an appraiser early in the process.
“Sometimes the comparables can paint an unrealistic picture—such as in markets where there have been a lot of foreclosures, which would have led to a drop in average home prices,” says Lerner. “A few years ago, some appraisers were inflating home values, on the assumption that prices would keep going up.”
Note that if real estate appraisers use distressed sales in their report, they must comment on why and the lender must be okay with their reasoning. So if foreclosures flood the market and essentially establish a new market value range, then it would be acceptable to utilize them. If, however, there are perfectly acceptable comparables to utilize that are not distressed and point to a higher value, the lender would not accept the use of these comparables.
Thus, Lerner says, it’s wise to hire an appraiser who knows the local market intimately and understands intangibles such as proximity to public transportation or the relative importance of lot size in different markets. “Appraising is both a science and an art,” she concludes.
About the Author: Joseph Dobrian has been writing about commercial and residential real estate, and real estate-related finance, for more than 30 years. His byline has appeared in The Wall Street Journal, The New York Times, The New Yorker, Real Estate Forum, Journal of Property Management, and many other publications. He is also a noted novelist, essayist, and translator. He can be contacted at [email protected].