Home Appraisals

Determining Property Value

Denver Residential Appraisal Guide

Appraisal GuideAppraisals 101Appraisal Questions

How Appraisers Determine A Property’s Value

One of the most critical parts of getting a mortgage in Denver is the Appraisal. An Appraisal is a professional estimate of the property’s value that you are planning to finance, and the primary purpose of an appraisal is to confirm the home value for the lender.

An appraisal is a professional opinion about what a property is worth based on a series of factors and common home valuation best practices.

Home appraisals do more than just determine the estimated value of a home for the purposes of the buyer or seller, an appraisal protects mortgage lenders from lending on an overvalued property.

Inspection Process

First step of an appraisal would be inspection. The appraiser is required to inspect the property that is needed of an appraisal to be certain of its value. The features of the property inspected are; the number of bedrooms, bathrooms, location of the rooms, etc. this is to ensure that there are in fact rooms on the property according to the property owner.

In most cases there is a sketch of the property included in given detail of the square footage supported in the layout of the property.

In essential to the appraisal, there are also defects that an appraiser looks for as well, really determining the property’s value.

Cost Approach

The easiest part to understand with an appraisal [incity] is the cost approach. With information on local building costs, such as how much the cost is for labor and other factors that would help in the determination of how much it would actually cost to rebuild such a property as the one being appraised.

The outcome of this value sets the maximum limit on what the property would go on the market for. This in fact helps the home buyer in whether or not it would cost less to build a property similar to it. However, the features of the property and location of it is not taken into consideration in this part of the appraisal process.

Sales Comparison Approach

To start on this approach, the appraiser will get to know the neighborhood’s surroundings, get a good understanding of certain features in the area and the value of it for residents. A couple of things to look for are; busy throughways, school zones, and traffic patterns. With this information gathered, helps in determining if any of these would be a value to the property. The main reason this approach will now come into play with researches done on recent market prices for in the area of other properties around it that are now in comparison with the appraised home.

With certain items that the property consists of such as hardwood floors, the square footage, additional bathrooms, fireplaces or view lots, the price of the property can now be adjusted if necessary based on the appraiser’s findings. So for instance, if the property being evaluated does not have as many bathrooms as the one it is compared to, but is asking for more in price-the appraiser is able to deduct the value of what the property does not have.

The Key Components Addressed In An Appraisal

The Site:
Location, View, Topography, lot size, utilities, zoning, external factors, highest and best use, landscaping features….

Quality of construction, finish work, fixed appliances and any defining features

Age, deterioration, renovations, upgrades, added features

Healthy & Safety:
Structural integrity, code compliance

Above grade and below grade improvements

If the property is conforming to the neighborhood

Functional utility:
Is the property functional as built – style and use?

Garages, Carports, Shops, etc.

Curb appeal, lot size, and conforming to the neighborhood are obvious to the appraiser when they drive down into the neighborhood and pull up in front of your home.

When entering your home, they are going to look at overall design, condition, finish work, upgrades, andy defining features, functional utility, square footage, number of rooms, as well as health and safety items. Be sure to have all carbon monoxide and smoke detectors in good working condition.

Since the appraisal provides half the weight in any credit decision involving the security of real estate, the appraisal should be done by a qualified, licensed appraiser whom is familiar with your neighborhood, and the type of home you are buying, selling or refinancing.

The Government’s Influence On Appraisals:

Appraisers hired for a mortgage transaction on conforming loan are chosen from a pool of qualified appraisers at random. Neither you nor your lender has the flexibility of deciding which appraiser will inspect your home.

This recent change was brought on with the Home Valuation Code of Conduct HVCC, and is effective with conventional loans, originated on or after May 1, 2009.

Questions About CO Appraisals

During periods of economic growth, when home values are typically just going up, most homeowners do not question appraisals much and in times of turmoil 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 value seems to be a hot discussion, let’s address the top appraisal myths and questions.

Why aren't my home improvements reflected in the value?
Not all improvements to the property are equal in producing added value. A local real estate investment club used to encourage on buying a run-down, roach infested property cheap, and after de-bugging and adding a fresh coat of paint and carpet-*presto*- the house would appraise like the new homes 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 o the “guts” of the property, the electrical, heating & air, etc. If they are updated, then the number of beds/baths and square footage are the next biggest weight, followed by a genuine updating of cosmetic improvements.

Don’t rush to make major upgrades if you are planning on selling your property. Call Jody Bruns with Skyline Financial to discuss home renovation loan programs that could be offered to the buyer and included in their purchase price instead of the seller paying out of pocket for upgrades that they buyer may or may not care for.

What about the homes in the next neighborhood that are the same?
For example, if a homeowner preparing a house to sell added $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 magazine 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 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.

Why is there a difference between list price and appraisal?
Why is there such a difference between what my appraised value is and the price that similar homes are selling for on my street?

It’s a great question, and you do not have to be a mortgage professional or a real estate agent to understand the answer.

The distinction lies in the purpose of the two valuations and who is responsible for creating them.

CO Appraisals:

The purpose of an appraisal is to make sure that an independent non-interested third party verifies the “most likely” sale price based on the market value and condition of the home.

CO appraisals are meant to be a realistic determination of the value of the home if it were to sell in the current market, in its current condition.

In addition, appraisers are governed by rules intended to standardize the subjective process of determining a home’s value.

Some of the key factors appraisers look at are: location, above ground size, room count, bathroom count, style of home, condition of property, amenities, and market conditions such as how long it takes for a home to sell and if values are increasing, decreasing or steady.

Appraisers are also asked to look only at comparable sales within a certain distance, usually one mile except in rural areas, and within a specified period of time, which is 3 months in the current market.

CO Listing Prices:

Listing prices on the other hand are influenced by the real estate agent, and set by interested and often emotional sellers.

Sellers are not held by any rules when they list a home. In some cases, sellers take what they paid for the house, add what they have spent on improvements and even add amount for profit.

Often times, sellers will list their home based on the amount needed to pay for the real estate agent, closing costs and cover the amount of the mortgages.

Extra low prices are generally the result of an extra motivated seller that has to sell and move in a rush, so they’ll list their property below market comps in order to be the most competitive.

Throw in bank owned (foreclosed properties). and listing prices may be all over the place without a logical explanation due to an asset manager decisions from another part of the country.

The Verdict:

While the list price is never a good indication of what a home in your neighborhood is worth, appraisals are not an exact science that will determine the true value of your home either.

Some will argue that a home is worth what people will pay for it, so there’s obviously a little room for personal interpretation. Either way, the bank securing that piece of real estate for a mortgage loan generally always has the final opinion that matters the most.

Why are foreclosures included as comps?
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 recent sales and trends as comparable values.

High foreclosure rates generally depress values and show a trend of constantly lowering value.

Why are similar homes in the same neighborhood valued so different?
This is a typical question for older neighborhoods where similar models may have drastic price differences.

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 to rise with the tide.

Bottom line is, the appraiser looks at several things when determining the value of the property: improvements, size and square footage of the living area, neighborhood amenities, location and the market trends around the area.

Lori Lee

Choose Lori for all your Denver real estate needs and please don't hesitate to call with any questions you may have @ (720) 940-3052 whether they are about buying or selling. Read more Top Buyer Tips or Top Seller Tips.

CLICK HERE for an instant online property valuation report.

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Skyline Financial Corp. is not affiliated with Lori Lee or their brokerage. Each is solely responsible for the products and services it offers.

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