The Appraisal Truth

Welcome to The Appraisal Truth

the appraisal truth
The purpose of this Consumer Advocacy Blog is to inform and educate the public on the topic of home appraisals.  In this home appraisal blog you will find tips, explanations and in depth articles on the home appraisal process. Feel free to subscribe to our feed or follow us on your favorite social network including Facebook. If you like something you read PLEASE share it with others.

Check back frequently for new articles. We will be posting on a regular basis. The blog will start with some home appraisal basics. Once the foundation established we will expand to include more sophisticated real estate material. If you need some clarification on a certain word or phrase, check our ever expanding glossary. If you have a question, comment or request please email us.

PreAppraise.com

The Appraisal Truth is brought to you by PreAppraise.com – specializing in pre listing home appraisals. If you are considering listing your home for sale or have had no success with a currently listed home, we strongly recommend obtaining a pre listing appraisal. Most sellers don’t understand the market value or their house. DON’T BE THAT SELLER!! Good buyers get preapproved – Good Sellers PreAppraise.

For Sale By Owner FSBO Home Selling

House For Sale by Owner FSBO

for sale by owner FSBOHomeowners often consider selling their homes themselves and attempt a for sale by owner sale FSBO. Now there are quite a few for sale by owner websites that a home owner could use making this daunting task a little bit more feasible.  What most home owners don’t realize is that there is quite a bit of time required to do it themselves. In doing this the home owner is usually trying to save money by not having to pay a commission to a realtor. When using a For Sale by Owner FSBO Company the home owner is actually paying for the ability for their house to be listed on the local MLS (Multiple List System) database that realtor’s use. What they don’t realize is they are going to have to pay a commission to a home buyer’s agent or else no agent will bring them potential buyer. So the reality is that they will have to pay half of the normal commission that would occur if they had hired a realtor.

House For Sale by Owner FSBO Hazards

What’s the downside of for sale by owner FSBO? The home owner will then have to blindly make changes to their home in order to “spruce” it up before putting it on the market. The difficulty in doing this is that they don’t have access to the recent sales that a realtor could provide. The home owner then has to decide what improvements to make that would increase the curb appeal but most importantly what changes would increase their profit, if any. The other big factor in doing for sale by owner is showings. When a realtor is hired they have the ability to show a property literally on any day at any time.  The home owner now has the onus of taking time out if they’re schedule to show the home or put a lockbox on their house and let agents show their house without being present. Lastly the home owner has to determine a list price and this number will have great impact on what potential buyers even look at their house. If the listing price is not within reason based on market sales, the number of days on market will quickly add up and a perception or stigma will get created that something is wrong with the house.

Pre Listing Appraisal – For Sale By Owner FSBO Selling Tool

The for sale by owner FSBO seller should use some of their resources to order a pre listing appraisal so that they have a concrete understanding of recent sales and where their house fits within the market. The home owner will be saving money on commission paid to a realtor, so why not pay for a service that will help set their list price. A pre listing appraisal from a certified third party, can be a very valuable negotiating tool and provides documentation that supports both a listing and contract price. In conclusion, all the hard work that a home owner must put into selling their house themselves can be nullified by not having a competitive list price. The pre listing appraisal is simply the most powerful home selling tool that is usually not utilized.

Pre Listing Appraisal – The Key To Home Selling

Pre Listing Appraisal – The Key to Home Selling

pre listing appraisalIn the real estate industry there is very little talk about home owners getting a pre listing appraisal before attempting to sell their house. Most homeowners know what an appraisal is because they had to have one completed when they purchased the home they live in. What is the appraisal process truly about; it’s about trust. The bank appraisal is ordered not for the buyers benefit but for the bank who is lending the money.

Home Selling Process without a Pre Listing Appraisal

When a home owner wants to sell their house, they meet with a realtor who may ask them to paint their living room, repair the deck or fence in the back yard, or install new landscaping. These items could cost around $200 to $400 dollars. I am being kind with the items that a realtor may suggest to change.  Then the realtor will present the homeowners with comparable sales.  Maybe the homeowner even looks at a free home valuation website. So now the homeowner has a spruced up property and with no formal training in home valuation must set a list price. The bottom line is they still don’t actually know what their house is worth.  Moreover, they don’t know where the home is going to appraise should they receive a contract offer.

The Need for a Pre Listing Appraisal

Had the home seller spent the same amount of money on a pre listing appraisal from a certified appraiser they would have had at least had tangible proof in the form of comparable sales that meet Fannie Mae criteria for comparison.  More importantly, by using the information contained in the pre listing appraisal, they would have had comparable sales that would defend a listing price.

When the bank appraisal is ordered for any home buyer, the bank appraiser is the advocate for the bank and also the buyer. Who is the advocate for the home seller?  The truth is the home seller does not have one. This is important because the home seller only has the bank appraiser’s findings as a point of reference. Had the home seller obtained a pre listing appraisal they would have a better understanding of their market and where their house fits into that market.

In conclusion, home selling is no longer a game of checkers but a game of chess. A pre listing appraisal seems to make the most sense from a logistics point of view and it would give a home seller a little bit of clarity in a very cloudy process.

Market Value of Home – Focus on Market

Market Value of Home – What Makes Up Your Market?

Market Value of HomeWhen considering the true market value of your home you have to look at what makes up the market. The market area typically consists of homes which have sold within 1 mile of your house and share similar size and design. Seems pretty simple, it’s not, now within every market there are on average 2 to 3 submarkets. To keep it simple look at it this way:

  1. The majority of the sales fit into a sub-market of arm’s length transactions. This means a typical seller / buyer transaction.  The home is listed on the public market for a reasonable amount of time and the seller and buyer are not unduly motivated.
  2. The second sub-market in most areas consists of distressed sales which would be short sales which are sales where the bank who owns the mortgage will allow the homeowner to sell the house for less than what they owe; other distressed sales include foreclosures and Bank Owned Properties known as REO’s (Real Estate Owned).
  3. The third sub-market consists of estate sales or non-arm’s length transactions which would be one family member selling their house to another family member below market value.

Market Value of Home – Distressed Property Effect

How does this affect the market value of home? If a market area has a high percentage of short sale and foreclosures then the market area as a whole is affected greatly because an appraiser will have to use one of the distressed sales as a comparable sale because of the fact there isn’t enough arms’ length sales available for comparison.  So if short sale and foreclosure sales are saturated in your market than your value will be affected.

Market Value of Home – Determined by Home Appraisal

The “typical home buyer” does not normally purchase short sales or foreclosures. Those properties are typically bought by investors looking to flip them. With that in mind, how could a home owner have the knowledge or the data to conclude if sub-markets would affect their value? The truth is they cannot. This simple example shows the true need for an objective third party appraisal for any home owner looking to sell, refinance, or obtain a reverse mortgage. Most free home value websites run a simple algorithm (fancy word for a math equation) and come up with a value without considering how the properties used in value determination were obtained. An appraiser cannot simply take all the sales within a market area and divide that number by the number of sales. There is expertise involved in weeding out the sales that a typical buyer would not consider for purchase. When determining market value only “competitive” comparable sales should be used in concluding a final fair market value. The typical homeowner is just not equipped to take on this task.

Market Value of Home Today

The job of determining a home’s fair market value has gotten considerably harder since 2008 and the home owner is unfortunately presented with this daunting task. When determining the actual market value of home for the home owner the best solution would be to use a certified appraiser. This fact now more than ever would logically dictate that a pre appraisal be completed before a home owner should consider any financial transaction.

How Accurate is Zillow Zestimate?

How Accurate is Zillow Zestimate?

how accurate is zillow

Source: Zillow.com

As a home appraiser, I get more than the occasional homeowner that says…

“Why don’t you just use Zillow?” or

“I already know what my home is worth.  I looked on Zillow.”

Even our most sophisticated clients tend to ask the question “how accurate is Zillow Zestimate?”

To answer “how accurate is Zillow Zestimate” you need to look no further than the Zillow website.  The answer is LESS THAN prominently provided in a link at the bottom of the page labeled “Zestimate.”   “The Zestimate® home valuation is Zillow’s estimated market value, computed using a proprietary formula. It is not an appraisal”, as stated on Zillow.com.  The problem with this lip service is that estimating market value of a home is precisely what a home appraisal is.

Data on How Accurate is Zillow Zestimate?

How accurate is Zillow Zestimate

According to Zillow.com

Suppose your home actually appraises for $200,000 by a certified home appraiser.  Now apply the Zillow national error rate of 8.7%.  Your home value may estimate up to $17,400 over value or under value.  This would give you a range from $182,600 to $217,400.  On a $200,000 home that is a spread of $34,800.  This makes using Zestimates for anything more than playing monopoly an issue.  More importantly, this is for the lucky half.  The losers of that coin flip see more extreme variations in value.   How accurate is Zillow Zestimate?  Summed up, SCUD missiles are more reliable.

Zillow claims, “the Zestimate is a starting point in figuring out the true value of a house.”  They suggest that they are a good tool for home sellers and home buyers.  But with error rates that high, I suggest that this is misleading at best.

What do Zillow users Really Know About Zestimates?

Zillow claims “Most understand that the Zestimate is exactly that, an estimate of the value of a home.”  On what statistic, survey or reality is this based?   Here is what I do know.  Zillow ranks at the top of search engine results for many search terms like “what is my home worth”.    Being the authority site that they are, I suggest that most users don’t understand what the Zestimate is AND just how inaccurate it is, even in the markets where they have the best data.  According to the Zillow advertising page, they have over 70 million unique users a month.  How many of these 70 million users have read and understand how accurate the Zillow Zestimate is?

How Do I Find Out What My House is Worth?

The best way of determining the market value of your home is to get a home appraisal through a certified home appraiser.  Home appraisers have the education, market knowledge and local data that is required to form a credible opinion of value.  For what it is worth, Zillow actually recommends this. PreAppraise has started to compile data on actual home appraisals and corresponding Zillow Zestimates. We will publish our finding once we get enough data.

Home Appraisal Maryland (MD)

Home Appraisal Maryland Observation

home appraisal marylandPreAppraise has extensive experience in the home appraisal Maryland market.  In the current home selling climate within Maryland there is almost always a shortage of properties that are for sale. Meaning for every 20 houses that sell there are 10 active listings. You would think it would be a seller’s market right? Wrong!  What I have noticed in the markets which have a median sale price range of $150,000 to $250,000 is that there are quite a large number of renovated properties in the active listing inventory. Most of these properties were acquired through short sale, foreclosure or auction. Basically through some distressed situation.

The Effect of Flipping on Home Appraisal Maryland

How is this having an effect on competing properties within those markets? It is fairly simple; let’s say an investor buys a row home through a foreclosure for $100,000. They normally pay between 50% and 70% below market value for those properties. That property is then gutted and renovated at an average cost of $50,000. The investor then lists and sells that property very quickly for $190,000 and is on to the next flip. These properties sell so quickly because most 1st time home buyers do not want to have to pick up a paint brush. The collateral damage that is starting to rear its ugly head from the mortgage mess of 2008 is becoming noticeable (again). In some markets you have more active listings that are renovated than non-renovated properties.

The Effect on Long Time Homeowners for Home Appraisal Maryland

How does the flipping effect home sellers within those markets who have been living there for a long time? The home owner who has been in the same row house for 30 years should have a gain in fair market value equal or near to the sale price of the house which was flipped and sold for $190,000. The problem is most home owners who have been in the same neighborhood for 30 years have made improvements to they’re home over that time period but most have not occurred recently. Those properties now have an inferior condition when compared to the renovated property. From an appraisal stand point it is unfortunate for those original owners because they will have to renovate they’re homes in order to obtain a top of the market sale price. What should have been normal appreciation in value has now been shattered by the irresponsible lending practices that happened between 2005 and 2008.

Home Appraisal Maryland Conclusion

Here we are in 2014 and the market is being flooded with both small and large investors who are gobbling up the distressed properties and capitalizing on them. Maryland still has a large number of foreclosures which have not been taken back by the banks. Renovated homes do represent the top of the market usually and they are not necessarily being sold for top dollar. Most are being sold for whatever the profit margin is that an investor wants to make. This too is a cycle home owners will have to ride out. This also makes it that much more important to get your home preappraised before you list it as markets are becoming more and more difficult to interpret. This sure is not fair to responsible home owners but it is absolutely a big factor in the marketplace and home appraisal maryland.

Home Appraisal for Refinance

Home Appraisal for Refinance and Home Equity

home appraisal for refinanceIf you are considering refinancing your mortgage you need to ask yourself the most important question – “Do I have enough equity in our home to refinance?” This is the primary factor that allows home owners to refinance. The home appraisal for refinance establishes the value of your home.  The home appraisal for refinance is the first part of the equation. Everything else in the refinance process is based on the home appraisal.

The 80/20 Rule in Home Appraisal for Refinance

You can have all the money and credit in the world but certain ratios must be met for the new loan or the bank will not lend the money.  The ratio I speak of is 20% equity, for example if your house appraises at $200,000 and the payoff for your existing mortgage is less than $160,000 you would roughly have 20% equity in your house. Fannie Mae is responsible for this guideline that all lenders adhere to nationwide.  A homeowner cannot get around this lending guideline.

The 80/20 ratio also applies to home owners who acquired an FHA mortgage and was issued PMI private mortgage insurance. The FHA or any other lender will also require that a home have 20% equity in order to remove the private mortgage insurance that was issued.  This can be a very tricky process for a homeowner to navigate. For example, let’s say that a home was purchased as a short sale or a foreclosure below market value and mortgage insurance was issued. If the home owner tries to refinance the existing mortgage within a three year period Fannie Mae will require an explanation from an appraiser stating how the house is now worth more than 15% of the original purchase price. A home owner could have a slight market value gain because the acquisition of the property occurred through a distressed sale. The rest of the market value gain will have to come from the renovating or remodeling of the property.

The Pit Falls in Home Appraisal for Refinance

When a homeowner applies for a refinance they give the loan officer a credit card and they are charged on average $450 dollars for the appraisal. The homeowner also provides proof of income, proof of employment, and possibly blood type – (Just Kidding). After about a month the bank appraisal is finally ordered. Many times, the homeowner then finds out that there house did not appraise at the value required for the loan.   Those fees are not refundable and the homeowner takes the loss.

Home Appraisal for Refinance – Know Before You Start

Preappraise.com can help in very important ways. We recommend the homeowner be proactive.  Order a pre-refinance appraisal and find out the value for half the cost of the lender’s home appraisal for refinance. The pre-refinance appraisal will give you the market value of your home.  You know what you owe.  These two things determine your equity.  If you don’t have at least 20% equity there is no reason to apply for refinance and waste time and money.

On the other hand, if the pre-refinance appraisal justifies moving forward, the homeowner will have tangible proof of their home’s current market value. A home owner would gladly pay for the bank appraisal knowing that when they refinance at a lower rate they would save tens of thousands on interest or the removal of private mortgage insurance through the new loan. In addition, a pre-refinance appraisal provides comparable sales that can be presented to the bank appraiser. The pre-refinance appraisal demonstrates a home owner’s due diligence and more importantly shows concrete awareness of what their house is worth.

FHA Home Appraisal for Sellers

FHA Home Appraisal – Why Home Sellers Need to be Concerned

FHA home appraisalIn the home buying marketplace there are many different types of mortgage products available to consumers. The most popular in recent years is the FHA mortgage. The FHA mortgage allows a borrower to put down 3.5% towards purchasing a home. This is extremely prevalent in today’s mortgage climate because a conventional mortgage requires 20% down in order to purchase a home. The average sale price for a home in the United States last year was $198,000. If a home buyer went with a conventional loan they would need to put down $39,600 plus closing costs. If a home buyer goes with an FHA loan they will have to put down $6,930 plus closing costs. This is why home sellers need to be prepared for an FHA buyer and FHA home appraisal.

FHA Home Appraisal Guidelines

In a previous article entitled “Home Appraisal Tips”, I mentioned FHA Appraisals that resulted in required repairs. Those mandated repairs stay in the FHA Appraisal database for 1 year. Here is more clarification on the process. An FHA case number is generated for each FHA mortgage application, what most people do not know is that the number is actually attached to the property that is being sold. This makes getting a pre listing appraisal so important. In most scenarios, value is the biggest deal killer within an FHA purchase. If you list your house and have a contract offer from an FHA buyer and your house does not appraise then the appraised value stays with that property for six months, even if a different FHA buyer comes along. The second biggest deal killer is repairs. Repairs stay in the database for 1 year.  Sellers not having an understanding of what the FHA requires an appraiser to report is as foolish as determining a listing price without getting the property preappraised.

Effects of Failing a FHA Home Appraisal

Whether a property under-appraises or has repair issues within an FHA appraisal, here is the unfortunate chain of events that could happen. If a property was listed in March and was appraised in June the homeowner will have to wait a minimum of 6 months due to FHA rules and most likely wait until the following March in order to sell the property at a higher price. This occurs because the real estate purchase “season” is between March and October. Most people don’t list their homes between November and February because of the holidays and if the home owner has children they do not want to move in the middle of the school year. This translates into a homeowner making 12 months of mortgage payments on a house they do not want to own. All of this can be avoided if home owners go against the way real estate has been sold for the last 50 years by getting a pre listing appraisal.

Good Buyers get preapproved.  Good Sellers PreAppraise

What is My Home Worth?

The Golden Question – What is My Home Worth?

what is my home worth

What is my home worth? All homeowners ask themselves this very question when it comes time to sell. In most cases the average homeowner doesn’t know the TRUE answer to this question. Yet, the way the home selling process works, the home owner is asked to determine a value and list price. Before any home owner can realistically set a listing price, they would have to have a solid understanding of their market and be able to interpret where their house fits within that market.

What is my home worth? Fannie Decides

In case you didn’t know, most lenders follow Fannie Mae guidelines in both the loan qualification process and in the home appraisal process. If both the buyer and the appraisal don’t meet Fannie Mae guidelines the mortgage financing will fall through. Realtors present comparable sales to a prospective client but usually the home owner has a set number in their head and come hell or high water that is what they are going to list their house for. Most realtors accept the listing price just to obtain the listing and get contracted by the home owner. This is a huge mistake because you cannot sell your house based on projected profit. In some instances home owners simply cannot afford to sell their house.

So to answer the question ‘what is my home worth?’ in the most direct way, your home is only worth what it will appraise for and it is ultimately only worth what someone is willing to pay for it. I do feel compelled to share with you that according to the National Association of Realtors (25%) of sales contracts fail at time of appraisal. They fall short of the value and either have to renegotiate at a lower number or even worse – cancel. The main reason for this is that those home sellers did not get their property preappraised prior to listing their home.

What is my home worth? Know Before You List

Having your house preappraised prior to listing it is the only way for a home owner to remove the guess work. Most importantly, they find out what their house is worth after having it evaluated by a certified appraiser who is licensed. There are many stringent property characteristic guidelines certified appraisers must follow when determining fair market value. An example would be if two houses located on your street sold recently, there is a good chance they may not meet Fannie Mae criteria for comparison and an appraiser may have to exclude those sales for different reasons. Only a certified appraiser can make that determination, not a realtor nor a home owner. These guidelines are created and implemented by Fannie Mae and followed by all mortgage lenders.

After the mortgage mess from the mid 2000’s lawmakers and lenders have ratcheted down lending guidelines making it more difficult for people to sell their homes. That is why it is imperative that home owners have a pre listing appraisal completed prior to listing their property. It is all too common to see a property get contracted, have a home inspection completed, repairs made by the seller only to have the appraisal come back and not meet the contract price. If the home seller does not have the cash to make up the difference in price or seller concessions they are back to square one. Three to six months of wasted time, money and effort down the drain when a pre listing appraisal could have remedied the entire situation.

Good buyers get preapproved. Good sellers PreAppraise!

Home Appraisal Tips

Home Appraisal Tips for Sellers

home appraisal tips
Being an appraiser, I see anxiety and the look of fear on a home sellers face when I walk through the door. Here I will share my home appraisal tips for sellers. My goal is to shed some light for home sellers and best prepare them for the home appraisal.

Put the Home Appraisal First

This is probably the best of all home appraisal tips. The tip is to get a pre-appraisal. The market is very difficult for a home owner to interpret and the listing price is paramount. A realtor can make suggestions and provide comparable sales, but they do not always understand which comparable sales are allowable for use within an appraisal report. Don’t wait until the end of the process to know your home’s fair market value.  Even if you find a willing buyer, it doesn’t mean your home will appraise for the contract price.

Prepare a List of Improvements

The second home appraisal tip is list your improvements. Make a list of all improvements that have been made and the year they were completed. Break the list down into two categories. Presenting this list to the appraiser is a tremendous help.

  • Mechanicals, (I.E.) new roof, new heating and cooling, new hot water heater, new windows, updated electric and updated plumbing.
  • Cosmetic improvements, (I.E) remodeled kitchen, remodeled baths, new carpet, new hardwood, ceramic, or laminate flooring, new drywall, new fixtures, new decks, porches or patios, new fencing, new landscaping (retaining walls), and new driveways.

Be Proactive and Fix Things Prior to Appraisal

The third tip I will provide you is regarding the condition of your property. This is actually a lot of home appraisal tips combined.

Safety is the number one concern within Fannie Mae guidelines. If your house is not safe you are asking for trouble.  Making repairs prior to a home inspection or a home appraisal requesting them could save you not only money but the entire sale.

  1. Make sure all of your mechanicals work. The appraiser will turn the furnace or central air on. They will also turn on faucets, light switches, and plumbing fixtures.
  2. Clean your house. Infestation is on page 1 of an appraisal report. If you have ants, cockroaches, rats or mice in your home the appraiser will note it in the report.
  3. Look for peeling paint on any surface. If your house was built prior to 1978 the appraiser will require all peeling paint to be removed and encapsulated by re-painting the peeling areas.
  4. Mold or anything that looks like mold should be removed.
  5. If any of the following items are damaged or missing replace them.
  • Handrails
  • Steps
  • Decks
  • Drywall
  • Drop ceilings
  • Siding
  • Roof shingles

If any of the above conditions exist, the appraiser will require repairs. For example, if there is mold, the appraiser will call for an inspection from a mold remediation company which may run a home owner $2,000 to $5,000. If repairs are mandated and your buyer is getting an FHA loan, the repairs will be in the FHA appraisal database for 1 year. So if the repairs make you lose your first buyer, the next FHA buyer that comes along will be informed by the FHA that repairs are required. In short, these repairs can cost the home seller more than money. It can cost them their buyer and also the ability to sell their home.

Supply Your Comparable Sales

The last of my home appraisal tips involves comparable sales. If you had a pre listing appraisal done, I encourage you to provide the appraiser with the comparable sales used to arrive at your listing and sale prices. While the appraiser will do their own analysis, it may help.

Take your home appraisal tips from a home appraiser!

What is a Home Appraisal?

What is a Home Appraisal – Defined

what is a home appraisalSo what is a home appraisal? Simply put a home appraisal is an objective opinion of value. Establishing market value is the most common purpose for obtaining a home appraisal but it is not the only purpose. Market value is the most probable sale price of a property when typically listed on the open market for a reasonable amount of time.

Types of Home Appraisal

There are many types of home appraisals. The type of home appraisal is generally named for its intended use. Listed below are just a few types of home appraisals and their descriptions.

  • Bank or Lender Appraisal – an appraisal of a home intended to establish value for a loan.
  • Pre listing Appraisal – an appraisal of a home intended to establish value and listing price.
  • Probate Appraisal – an appraisal intended for use in legal proceedings. Divorce appraisals would be considered a type of probate appraisal.
  • Estate Appraisal – a home appraisal completed for the beneficiaries of an estate or will.

Credibility of a Home Appraisal

While professionals like real estate agents may offer estimates of value, only a professional appraiser may offer an opinion of value or appraisal. A qualified appraiser is educated, experienced and objective. They are not only qualified in the type of appraisal but also the market conditions influencing the real estate being appraised. In order for an appraisal to be considered credible it should implement an orderly process in which the opinion of value is determined.

Home Appraisal Standards – USPAP

Appraisers and home appraisals mostly adhere to the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP is the generally accepted standard of appraisal in the United States. USPAP provides a minimum set of quality control standards used in the development of real estate appraisals. It is required that USPAP be followed for all appraisal work performed for federally regulated institutions (FHA Loans, Fannie Mae, Freddie Mac).