Five Myths About Home Values
When home values are going up, most homeowners do not question appraisals.
When property values are declining, home sellers and even listing agents quite often question and pick apart appraisals.
However, the actual appraisal process changed very little over the course of the housing boom and bust cycle American homeowners witnessed between 2001 – 2009.
Since the topic of home values seems to be a hot discussion, let’s address the top five appraisal myths.
Appraisal Myths / Questions:
“I just put $15K into the property, why isn’t the appraised value higher? ”
Few improvements to a home will greatly impact the amount of an appraisal. Very rarely will a homeowner receive a dollar-to-dollar matching on an appraisal for the improvements they make. Just because you have made improvements to the home doesn’t mean it will make it appraise like the newer home up the street.
Even with cosmetic repairs, the property may still be much more comparable to the foreclosure next door than the new home a block away. Look first to the functional parts of the property such as the windows, electrical, heating & air, etc. Then the number of beds/baths and square footage are the next biggest weight, followed by a genuine updating of cosmetic improvements such as updating an outdated, less functioning kitchen.
“But my home really compares to some of the properties in the neighborhood across the way…”
For example, if a homeowner preparing a house to sell makes $150,000 in upgrades to the kitchen, built-in cabinets and flooring, it may help the property show better in an open house and in advertisements.
However, the seller might still be stuck with a $450,000 appraised value like the three comparable properties on their street vs the $750,000 they were hoping to list it for.
Even though the neighborhood across the main street had similar homes in the higher price range, especially after the seller’s extensive upgrades, appraisers have to follow strict guidelines and standards of practice and will always use homes from the actual neighborhood to establish value first.
So basically, the seller simply over-improved their home for their specific neighborhood.
“This appraiser included foreclosures as comps – that’s not fair”
It isn’t fair, especially if your home is well-kept and in great condition compared to the run-down foreclosures in the neighborhood.
Unfortunately, if every recent sale, or nearly all sales, are foreclosures at reduced prices, then the appraiser is forced to use the recent sales and trends as comparable values. High foreclosure rates generally depress values and show a trend of lowering prices.
If you are experiencing this type of market and don’t need to sell then it may be best to wait for the trend to change. Since real estate has shown to be a cycle of ups and downs, patience may payoff in the long run.
“But I just put in a $50K pool, doesn’t that count for anything?”
Pools and professional landscaping rarely see a dollar for dollar value in an appraisal. The value is going to mainly be based on comparable sales in a neighborhood. For example if homes in your area have sold with pools then they will be considered equal regardless of the amount you spent. If there are not any sales in your neighborhood with pools then appraisers will use a standard adjustment for the area. This adjustment can be somewhere between $15,000-$35,000 but really just depends on your market.
“How can similar homes in the same neighborhood appraise for such different values?”
This is a typical question for older neighborhoods where similar models may have drastic price differences.
Additional rooms and square footage can be the main reason for one property appraising higher than another.
Keep in mind, just because the market trend in a particular neighborhood is improving over time, the individual properties need to meet the same conditional improvements as the others in order rise with the tide.
An appraiser is looking at several things when determining the value of a property: improvements, size and square footage of the living area, neighborhood amenities, location and the market trends around the area.