What are those appraisers thinking? An Election Day rerun.
(Editor’s Note: If you are reading this, stop it right now and GO VOTE!)
From my inbox yesterday:
“Your site looks great, but I noticed that you've only had three blog posts since Wednesday, May 25, 2011. I'm sure you are just too busy to write blog posts every week!”
Why, yes. Lately, I have been a little busy. That’s not the point.
This was a fitting message on what was the eve of voting day – fitting, that is, because it is blatantly false. Why, just three weeks ago I wrote about… well, stuff. But, the point is, I have written about a lot of “stuff” since May 25, 2011.
Even though I knew in my heart as I read this little disciplinary note (a note, coincidentally, sent by a company who would love to blog for me for a small monthly fee), I found myself doubting myself. Much like the political ads we have been bombarded with of late are mostly absurd, if we are subjected to them often enough and for long enough, we start to question what we know to be true.
“Maybe that candidate does hate freedom and fuzzy kittens; maybe that other guy did knock off a liquor store in 1962.”
“Maybe I haven’t blogged since 2011.”
Fortunately, a few seconds of my own fact checking confirmed that our blog, while not exactly falling into the “breaking news” category lately, is alive and well. It was during this fact checking that I stumbled upon the following post worthy of a revisit.
Appraisals. In this market of so many buyers and so few listings, in this market of multiple offers, fierce competition among would-be homebuyers, and appreciating prices, appraisals are once again becoming the bane of all folks who commit random acts of real estate for a living. Appraisals are also no picnic for sellers.
Your home is ultimately worth not what a buyer is willing to pay but what the appraiser says it is worth. I know, I know. Your house is special – way more special-er than the one that sold down the street last month. In this trip down memory lane, we’ll look at what bonus points an appraiser might award for each of those features of specialness.
This represents but one independent “poll,” of course. Your mileage may vary. The important thing to remember is that appraisers are like undecided voters. They are all different, and you can’t possible predict the voting outcome prior to Election Day.
When pricing your home to sell, you have two audiences to consider. First, of course, there is the potential buyer. But remember, unless that buyer is Warren Buffett or some dude who has been cashing in his aluminum cans at the recycling center for a very long time, chances are he is going to need a loan. And before that buyer can get loan approval, the lender is going to want a neutral third party to confirm the value of the home. Enter the appraiser.
"But it has to appraise!" we find ourselves hollering a lot lately, often to a bunch of non-believers seated at the kitchen table. You see, you may know that you spent $247, 850.98 on all of your stunning improvements. Heck, you have receipts! And I may know that your wood floors are not just any wood floors, but made of materials hand-crafted by indigenous peoples of the exotic rain forests of Malaysia… or Burbank.
The appraiser doesn't care. He doesn't care if you selected the higher-end granite or popped for the pull-out cabinet shelves. She doesn't care if your windows were installed by a certified Pella specialist or by Gus from your golf foursome who has a booth at the swap meet on weekends.
All of this got me thinking. How much value, exactly, will an appraiser place on a home's various and sundry, unique qualities? So, I embarked on a little research project. With the help of our awesome San Diego Castles agents who provided me with much of the necessary research materials, I compiled a sampling of eleven recent appraisals. These appraisals were commissioned for transactions in which we represented either the buyer or seller. The results? A lot of confusion, I'm afraid, but I'm guessing the results might surprise you.
First, know that the majority of the time, we never see the appraisal. The appraisal belongs to the buyer, so if we are representing the seller, we aren't privy to the actual, written report. And even when we are representing the buyer, the lender will simply tell us that the appraisal "came in at price," and we march along our merry way toward closing.
The fact is that appraisals almost always comes in "at price." Buyers are so smart. It seems that in almost every case, the buyer has offered to pay exactly what the appraiser ultimately concludes the home is "worth." Super impressive! But, here's what you need to know. The point of the appraisal is to assure the bank that their investment is solid and that there is no funny business going on. We all know that coming up short on appraised value means no loan, which leaves us all scurrying to renegotiate. In the bank's eyes, a higher appraised value makes them equally nervous.
Without further ado, here are the results of my compare-and-contrast take-home assignment. First the spreadsheet, and then I shall perform a little interpretive dance. Keep in mind that appraisals work like this: The home being appraised is the "subject" and the sale prices of all of the "comparables" are adjusted either up or down to reflect the varying features with the goal that, ultimately, the appraiser is comparing like fruits. (Note: For line items where no adjustment value is given, the properties were either considered to be equivalent or the appraiser didn't consider that particular feature relevant to value.)
This one was a stand-out as being fairly consistent among appraisals. They will generally give you props to the tune of $15,000 to $20,000 for having one, and it doesn't matter if your pools is a simple rectangular concrete watering hole or something reminiscent of a scene from Blue Lagoon.
I have never seen an appraiser give credit for a built-in backyard barbecue. Never, that is, until my most recent appraisal. This time, we were awarded 10,000 bonus points. Practically speaking, don't expect the same treatment. This was an anomaly. And, it is worth mentioning, that we got this credit for a barbecue we didn't even have.
This one might be the biggest surprise of the bunch. Buyers, sellers and agents know that there is a world of difference between a three-bedroom and four-bedroom home — so much so that these properties attract different buyer pools altogether. However, appraisers only look at "room count." So, whether that extra room is a bedroom or bath (or half bath, because they round up!) makes no difference. With one exception, our appraisers considered the extra room worth between $1,500 and $5,000. The exception? One appraiser gave a $35,000 credit for having an extra bedroom. Like my barbecue, don't count on this.
Most of our appraisers didn't care. A patio is a patio, they concluded, so no credit was given. One appraiser did consider that having a patio or balcony versus none was worth $1,000. Another (our lover of the outdoor barbecue), gave a $10,000 credit simply because our patio was covered and the others were not. (Punch line: $10,000 is very close to the estimate we received from the termite company to replace the patio cover that was the victim of much wood rot.)
This one is oh-so subjective, so any credits will be dependent on the appraiser you are assigned. One appraiser dinged a home by $20,000 for backing to a road but made no adjustment to the home that's side yard abutted a busy road and gave no concession for a cul-de-sac location. Another thought the cul-de-sac was worth $5,000. And our beach property? The appraiser made upward adjustments of between $50,000 to $100,000 the closer a property was to the big blue wet thing. Eight appraisers ignored location altogether.
I have always found this one slightly flawed. Usability, design, quality of landscaping and hardscaping, the fact that the rear neighbors' homes are slightly elevated giving you that charming "amphitheater" feel — those things are rarely considered. On the other hand, the lot size shown on your Assessor's record will get you between $1 and $6 per square foot in our study.
We've already adjusted for room count, but here is our double-whammy. Square footage of the home will be adjusted. By how much? Beats me. Our appraisers applied values of between $35/square foot and $135/per square foot. This one is a turkey shoot at best.
$1,000 to $5,000, depending on… well, I'm not sure.
You will be awarded $4,000 to $5,000 for an extra garage stall. If you have a garage versus a parking space, the difference could be between $2,500 and $5,000.
Credits here were between $1,000 and $3,000, and while you might think it varied due to size of the home, it did not.
"How much is my view worth?" This is one we get all the time. The answer is that you will get some credit, but it won't be anywhere near the view premium you paid the builder when you bought that premium lot. First, we have our little beach pad. The beach is different. Here, our appraiser awarded price tiers of $50,000 for varying degrees of ocean view. Our barbecue enthusiast considered a view of Miramar Lake (the home was a first-tier, lake view home) worth $50,000, but gave our home no credit for having an open space view. With those two exceptions, "view" premiums ran between $10,000 and $20,000 depending on just how pleasant the particular appraiser considered the particular views.
Finally! This is where nearly every seller thinks they will get the standing O's. But, and I can't say this loudly enough, THERE ARE JUST THREE CATEGORIES OF CONDITION. They go by different names, but there are only three. You are either worse than, equal to, or better than the other homes in terms of upgrades in the eyes of the appraiser. Our credits were at least ballpark-consistent. Again, our one outlier was Sam the Cooking Man. He conceded a total swing of $60,000 between the homes in the poorest versus best condition. (In retrospect, he was quite generous on almost all fronts — and we still came up short on value.) As for the others, the pristine homes with the shiny new kitchens and remodeled baths were considered to carry only a $20,000 to $40,000 premium over their poorly maintained, under-improved counterparts.
There are other line items and considerations in the appraisal report, of course. "Year built" is a zinger and one for which, for the life of me, I can't decipher the formula. It appears to involve dreidels, Ouija boards, and a game of "Rock, Paper, Scissors." Those "extra rooms" are always fun. Our client who paid $50,000 for the fanciest California Room I have ever seen (complete with real Pella windows, cable, electrical, closets and ceiling fans) got a $5,000 credit and lost their buyer in the process.
Finally, there is a curious line item in the Uniform Residential Appraisal Report titled "Energy efficient items." I say curious, because I have never seen an appraiser take energy efficiency into account. Such was the case for Property 1 (remember the barbecue?). This home had a $50,000 energy system. The owner worked out of the home, and thus it was lit up like a runway every hour of every day. His heating and air conditioning systems worked non-stop, as he had a two-degree temperature span, and he heated his pool in December. Despite all of this, most months he sold energy back to the utility company. Appraiser's credit? Zip.
And what happens if your appraisal misses? You can appeal it, right? Of course! And we do. With the new appraisal rules, here is how the process works. We can't speak to the appraiser directly. He's neutral, remember? So, we prepare our thoughtful appeal and submit it to the lender who, in turn, will submit it to the appraiser. He will carefully consider our appeal, including all of the errors and oversights that you we respectfully pointed out. He will "duly note" those points that we have raised, and then he will give us a big, middle-finger wave.
The bottom line is that we can talk all day about what your home is worth to a buyer. We can talk about return on kitchen versus bath remodels and new roofs versus crown molding. But the reality is, your home is first worth what a buyer is willing to pay but ultimately, what an appraiser says you are worth.