Answering to Homeowners Myths
Factors Affecting Appraiser Valuation of a Home
Appraisers use certain criteria in their evaluation to determine property value:
To arrive at a market value estimate, an appraiser must consider both general and specific data as well as a comparison of similar homes. General data includes regional, city and neighborhood information and incorporates physical, economic and social factors that may influence property value.
After collecting the general data, the appraiser analyzes the relevant specific data. If the on-site appraisal inspection seems to move along at a relatively rapid pace, remember an appraiser is an informed professional whose trained eye misses little.
The appraiser will consider the following:
- Supply and Demand
In appraising your property, appraisers will consider local supply and demand such as: how many homes are for sale in your immediate neighborhood, how quickly are they sold, what are the conditions surrounding the sale, the number of people buying homes and the number of homes on the market.
- Economic Conditions
Economic conditions vary from region to region. Single-industry economies, strikes, plant closings, rezonings and outgoing corporations can have a negative impact on property values. However, new plant openings, incoming corporations or locally awarded contracts can have an uplifting effect.
- Financing Conditions
Both cost (such as interest rates or discount points) and availability of mortgage financing have a substantial impact on housing prices. If financing is costly or scarce and your home has a high-balance assumable mortgage with a low interest rate, its market value may be enhanced.
- Political Factors
State and local governments can affect property values. School bonds, zoning changes, property reassessment, new school appropriations, municipal salary increases, as well as taxes, all have an impact on housing prices.
- View from the Outside
On first seeing the house from the street, what will a prospective buyer think? Does the general condition of the home and lot contribute to the home's attractiveness? If you can enhance your property's "curb appeal," do so. Other appraisal considerations include: Is there popular demand for your architectural style? Is the home on a busy or secluded street? Is the street paved? Does it have a sidewalk? Does the community have a public water supply and sewage systems, or does it have a well and septic system?
- Inside The Home
How will a prospective buyer feel when entering the home? Does the overall condition reflect pride of ownership? Does the floor plan afford a satisfactory flow of traffic? Is closet space ample, and is the kitchen spacious and up-to-date? The appraiser will record the number and dimensions of rooms. Quality of construction, floor coverings, paint, wallpaper, age, type and condition of kitchen appliances and other factors that reflect the overall condition of the house will be closely observed by the appraiser.
- Other Factors
Appraisals are affected by many factors: a fireplace, lot size, a garage "under" versus one that is attached or detached, a screened porch as opposed to an open deck, a swimming pool, tennis court and even the electrical system (ample circuits for anticipated demand). The method of heating as well as energy savers, such as insulation, are significant factors in today's environment.
- The Time Factor
The appraiser must consider the time element. Housing demand, mortgage money availability and interest rates can change substantially over a period of time. The appraiser will consider the recent real estate market as well as the future market in determining the sales price of the home.
- Comparison with Similar Homes
An appraisal isn't complete unless your property is compared with similar homes - both in terms of current listings and recent sales. Current listings in a comparable price range being offered in the marketplace are your competition. These listings affect the marketability of your home and must be considered when determining value. As for comparable sale analysis, it's one of the most important elements in a professional appraisal. Appraisers are instructed to select at least three comparable properties for comparison. Ideally, each will be in the general neighborhood of the appraised home, similar in size, style and construction, and sold within the last three or four months. Such criteria can't always be met, but the appraiser will make every effort to find the best comparable sales. Appraisers use a comprehensive data bank of homes to find satisfactory comparables. Although properties that are substantially different are difficult to compare, appraisers have developed methods to adjust values for valid comparison.
By using the Broker's Market Analysis your real estate agent provided, you can give the appraiser a list of comparable listings and recent sales. While not absolutely bound to use them, the appraiser will carefully consider each in developing the market value of your property. Adjustments will be made to compensate for any differences that significantly affect market value, such as date and terms of the sale and location or architectural style of the home.
About Improvements
Improvement adjustments reflect the appraiser's estimate of market value rather than the original or replacement cost. Certain improvements, such as a swimming pool, may not be valued as highly by prospective purchasers as their cost would indicate. Surprisingly enough, a property may be over-improved. Your landscaping may be superior to that of your neighbors. You may have a cabana and swimming pool. However, it's often difficult to sell a house for $90,000 in an area of $60,000 homes. Along the same lines, your interior decor may be unique, but could have limited appeal. The appraiser is asked for an opinion: "Will this property sell without any modifications to its current conditions?" Because home selection is a highly personal and subjective process, an appraiser's estimate may be higher or lower than the eventual sales price. Nevertheless, the established value represents the most accurate means available for projecting what your house will sell for on the open market.
Satisfaction with an Established Value Offer
There are always circumstances where people believe their homes are worth more than the established values. An appraisal is only an estimate of value, and an established value offer is the average of the appraisals.
The Society of Real Estate Appraisers suggests you remember the following points when evaluating an appraisal:
There's even more to be said about the value of a good education. In real estate, a healthy school often begets a healthy housing market.
"Anecdotally, homes in good school districts sell faster and at higher prices," said National Association of Realtors spokesman Walter Molony.
The simple explanation is that parents with school-age children are willing to pay a premium for housing that gives their children access to superior schools. School data is now widely available, for free, on such sites as GreatSchools.net and HomeGain.com.
"In my town, property values differ based on what elementary school you're going to be in," added David Stiff, senior economist for Fiserv Case Shiller Weiss, in Cambridge, Mass. A house in a top school attendance zone – the area surrounding a specific school – would sell for at least 10 percent more than a similar house in a lesser school zone, he estimates.
In some areas, the difference in home values is even greater, said William Bainbridge, president and CEO of SchoolMatch.com and HouseAppreciation.com, which track school performance and property values for 15,530 different high school attendance zones.
The city of Chicago and the suburb of Park Ridge intersect on the same street, for example. Yet, home prices on the Park Ridge side are significantly higher than on the Chicago side, he said, because schools in Park Ridge are so much better.
Margaret Sullivan, executive vice president of the National Association of Independent Fee Appraisers said home values in her area, St. Louis, are affected not just by public schools but proximity to private schools and parochial schools. Appraisers usually take into consideration school performance when determining a home's value.
Cause or effect?
That houses near good schools sell for a premium is widely accepted. What is unclear, said Stiff, is whether top-notch schools boost housing values or whether rising home values (and property tax revenue) boost school performance.
It's possible that both are simply a reflection of the types of people moving into an area. "The performance of a school depends a lot on the families who attend them," he said.
It's also not clear whether school quality affects the rate at which home values appreciate. On the upside, houses in established neighborhoods may not have as much room to appreciate as property on the fringes. In down markets, however, houses that feed into good schools do tend to hold their value better, said Stiff. In other words, there is less price volatility.
Bainbridge argues that schools are a bigger force behind home prices. "We believe it is the school causing the property value to go up," said Bainbridge. "A few years ago, for example, Pine-Richland High School near Pittsburgh, Penn., brought in a fantastic superintendent," he said. "People started moving in because of the school, and then property values went up."
Also, the rate at which home prices appreciate does go hand in hand with school performance, he said.
To help illustrate this, CNN/Money asked Bainbridge for housing and school data in three randomly chosen metropolitan markets: Chicago, Denver and Pittsburgh.
Within each market, Bainbridge found five school zones with relatively high housing appreciation and five school zones with relatively low appreciation. After those areas were identified, he looked up each school's performance, which he rates on a scale of 0 to 99 using college entrance exams and the percentage of students taking those exams.
What we found was a clear correlation between school performance and housing appreciation. In fact, in the 15 zones with relatively high appreciation, the schools had an average rating of 90. In the 15 zones with relatively low appreciation, the schools had an average rating of just 32.
Not true everywhere
Of course, not everyone has schools on their mind.
According to an NAR survey of buyers in 2003, 25 percent of buyers in the suburbs cited schools as an important factor in their buying decision. But in urban areas, only 12 percent of buyers ranked schools high on their list of priorities. Shopping, recreation and entertainment proved more important. In resort areas, meanwhile, only 8 percent of buyers ranked schools high on their list.
"There are only two places we have found school values going out the window," said Bainbridge. One is beach property and the other is what he calls "historically preserved areas," urban areas that are being redeveloped.
"The people in these areas either don't have children or are depending on private schools," he said.
Appraisers use certain criteria in their evaluation to determine property value:
- Local taxes.
- Plat survey: size of lot, topography and landscape, easements.
- Deed. (Is the title clear? Are there any deed covenants that would limit use or resale opportunities?)
- List of improvements, especially to kitchen and bathrooms. (Do you have permits, if required, for the alterations?)
- Homeowner warranties.
- Value and condition of neighborhood houses.
- Zoning of, and plans for, any nearby vacant land.
- Age of neighborhood.
- Ease of access to work, schools, shopping and recreation.
- Adequacy and cost of utilities.
- Adverse influences (such as proximity to highways, high tension wires, commercial areas).
- Present and proposed assessments.
To arrive at a market value estimate, an appraiser must consider both general and specific data as well as a comparison of similar homes. General data includes regional, city and neighborhood information and incorporates physical, economic and social factors that may influence property value.
After collecting the general data, the appraiser analyzes the relevant specific data. If the on-site appraisal inspection seems to move along at a relatively rapid pace, remember an appraiser is an informed professional whose trained eye misses little.
The appraiser will consider the following:
- Supply and Demand
In appraising your property, appraisers will consider local supply and demand such as: how many homes are for sale in your immediate neighborhood, how quickly are they sold, what are the conditions surrounding the sale, the number of people buying homes and the number of homes on the market.
- Economic Conditions
Economic conditions vary from region to region. Single-industry economies, strikes, plant closings, rezonings and outgoing corporations can have a negative impact on property values. However, new plant openings, incoming corporations or locally awarded contracts can have an uplifting effect.
- Financing Conditions
Both cost (such as interest rates or discount points) and availability of mortgage financing have a substantial impact on housing prices. If financing is costly or scarce and your home has a high-balance assumable mortgage with a low interest rate, its market value may be enhanced.
- Political Factors
State and local governments can affect property values. School bonds, zoning changes, property reassessment, new school appropriations, municipal salary increases, as well as taxes, all have an impact on housing prices.
- View from the Outside
On first seeing the house from the street, what will a prospective buyer think? Does the general condition of the home and lot contribute to the home's attractiveness? If you can enhance your property's "curb appeal," do so. Other appraisal considerations include: Is there popular demand for your architectural style? Is the home on a busy or secluded street? Is the street paved? Does it have a sidewalk? Does the community have a public water supply and sewage systems, or does it have a well and septic system?
- Inside The Home
How will a prospective buyer feel when entering the home? Does the overall condition reflect pride of ownership? Does the floor plan afford a satisfactory flow of traffic? Is closet space ample, and is the kitchen spacious and up-to-date? The appraiser will record the number and dimensions of rooms. Quality of construction, floor coverings, paint, wallpaper, age, type and condition of kitchen appliances and other factors that reflect the overall condition of the house will be closely observed by the appraiser.
- Other Factors
Appraisals are affected by many factors: a fireplace, lot size, a garage "under" versus one that is attached or detached, a screened porch as opposed to an open deck, a swimming pool, tennis court and even the electrical system (ample circuits for anticipated demand). The method of heating as well as energy savers, such as insulation, are significant factors in today's environment.
- The Time Factor
The appraiser must consider the time element. Housing demand, mortgage money availability and interest rates can change substantially over a period of time. The appraiser will consider the recent real estate market as well as the future market in determining the sales price of the home.
- Comparison with Similar Homes
An appraisal isn't complete unless your property is compared with similar homes - both in terms of current listings and recent sales. Current listings in a comparable price range being offered in the marketplace are your competition. These listings affect the marketability of your home and must be considered when determining value. As for comparable sale analysis, it's one of the most important elements in a professional appraisal. Appraisers are instructed to select at least three comparable properties for comparison. Ideally, each will be in the general neighborhood of the appraised home, similar in size, style and construction, and sold within the last three or four months. Such criteria can't always be met, but the appraiser will make every effort to find the best comparable sales. Appraisers use a comprehensive data bank of homes to find satisfactory comparables. Although properties that are substantially different are difficult to compare, appraisers have developed methods to adjust values for valid comparison.
By using the Broker's Market Analysis your real estate agent provided, you can give the appraiser a list of comparable listings and recent sales. While not absolutely bound to use them, the appraiser will carefully consider each in developing the market value of your property. Adjustments will be made to compensate for any differences that significantly affect market value, such as date and terms of the sale and location or architectural style of the home.
About Improvements
Improvement adjustments reflect the appraiser's estimate of market value rather than the original or replacement cost. Certain improvements, such as a swimming pool, may not be valued as highly by prospective purchasers as their cost would indicate. Surprisingly enough, a property may be over-improved. Your landscaping may be superior to that of your neighbors. You may have a cabana and swimming pool. However, it's often difficult to sell a house for $90,000 in an area of $60,000 homes. Along the same lines, your interior decor may be unique, but could have limited appeal. The appraiser is asked for an opinion: "Will this property sell without any modifications to its current conditions?" Because home selection is a highly personal and subjective process, an appraiser's estimate may be higher or lower than the eventual sales price. Nevertheless, the established value represents the most accurate means available for projecting what your house will sell for on the open market.
Satisfaction with an Established Value Offer
There are always circumstances where people believe their homes are worth more than the established values. An appraisal is only an estimate of value, and an established value offer is the average of the appraisals.
The Society of Real Estate Appraisers suggests you remember the following points when evaluating an appraisal:
- A seller won't necessarily receive a return on his or her entire investment when selling property. Money spent on repairs or maintenance usually cannot be recovered when selling.
- Improvements or additions to a home usually don't increase the value by as much as their cost. An improvement that appeals to one owner may displease another, or have no appeal at all.
- Appraisers have access to reliable information on sales that the average homeowner doesn't have. To ask a friend or acquaintance how much his house sold for and use that as a comparison of values can be misleading. Even if your friend is willing to disclose the actual price, conditions surrounding the sale may have been entirely different from those in the sale of your property.
- The rise of construction costs and prices in the real estate market since the purchase of your home might indicate a higher value today. However, the appraiser may find that these increases in value have been offset by depreciation of the property due to age, style changes, natural wear and tear or postponement of needed repairs.
- Remember to have your agent complete the Broker's Market Analysis form as part of the appraisal process. This ensures that comparable home sales will be considered.
There's even more to be said about the value of a good education. In real estate, a healthy school often begets a healthy housing market.
"Anecdotally, homes in good school districts sell faster and at higher prices," said National Association of Realtors spokesman Walter Molony.
The simple explanation is that parents with school-age children are willing to pay a premium for housing that gives their children access to superior schools. School data is now widely available, for free, on such sites as GreatSchools.net and HomeGain.com.
"In my town, property values differ based on what elementary school you're going to be in," added David Stiff, senior economist for Fiserv Case Shiller Weiss, in Cambridge, Mass. A house in a top school attendance zone – the area surrounding a specific school – would sell for at least 10 percent more than a similar house in a lesser school zone, he estimates.
In some areas, the difference in home values is even greater, said William Bainbridge, president and CEO of SchoolMatch.com and HouseAppreciation.com, which track school performance and property values for 15,530 different high school attendance zones.
The city of Chicago and the suburb of Park Ridge intersect on the same street, for example. Yet, home prices on the Park Ridge side are significantly higher than on the Chicago side, he said, because schools in Park Ridge are so much better.
Margaret Sullivan, executive vice president of the National Association of Independent Fee Appraisers said home values in her area, St. Louis, are affected not just by public schools but proximity to private schools and parochial schools. Appraisers usually take into consideration school performance when determining a home's value.
Cause or effect?
That houses near good schools sell for a premium is widely accepted. What is unclear, said Stiff, is whether top-notch schools boost housing values or whether rising home values (and property tax revenue) boost school performance.
It's possible that both are simply a reflection of the types of people moving into an area. "The performance of a school depends a lot on the families who attend them," he said.
It's also not clear whether school quality affects the rate at which home values appreciate. On the upside, houses in established neighborhoods may not have as much room to appreciate as property on the fringes. In down markets, however, houses that feed into good schools do tend to hold their value better, said Stiff. In other words, there is less price volatility.
Bainbridge argues that schools are a bigger force behind home prices. "We believe it is the school causing the property value to go up," said Bainbridge. "A few years ago, for example, Pine-Richland High School near Pittsburgh, Penn., brought in a fantastic superintendent," he said. "People started moving in because of the school, and then property values went up."
Also, the rate at which home prices appreciate does go hand in hand with school performance, he said.
To help illustrate this, CNN/Money asked Bainbridge for housing and school data in three randomly chosen metropolitan markets: Chicago, Denver and Pittsburgh.
Within each market, Bainbridge found five school zones with relatively high housing appreciation and five school zones with relatively low appreciation. After those areas were identified, he looked up each school's performance, which he rates on a scale of 0 to 99 using college entrance exams and the percentage of students taking those exams.
What we found was a clear correlation between school performance and housing appreciation. In fact, in the 15 zones with relatively high appreciation, the schools had an average rating of 90. In the 15 zones with relatively low appreciation, the schools had an average rating of just 32.
Not true everywhere
Of course, not everyone has schools on their mind.
According to an NAR survey of buyers in 2003, 25 percent of buyers in the suburbs cited schools as an important factor in their buying decision. But in urban areas, only 12 percent of buyers ranked schools high on their list of priorities. Shopping, recreation and entertainment proved more important. In resort areas, meanwhile, only 8 percent of buyers ranked schools high on their list.
"There are only two places we have found school values going out the window," said Bainbridge. One is beach property and the other is what he calls "historically preserved areas," urban areas that are being redeveloped.
"The people in these areas either don't have children or are depending on private schools," he said.
