Have you ever gotten an appraisal back on your property and were disappointed by the results? You were certain you had a good idea what the property was worth, yet the appraiser has come back with something significantly lower, and you can’t comprehend how he/she has come up with that value. You might say something like “what is wrong with these appraisers anyway, are they out to kill the deal?” Most likely that is not the case. In fact, it would be much easier to provide a value that will make everybody happy. However the appraisal is a process, and good appraisals have all the elements of a good novel. Except, instead of plot development leading up to a climax, a good appraisal should provide strong market research leading to a highest and best use, which, in turn, drives property value. Here are some factors to consider when reading through your appraisal, or better yet, before you order an appraisal:
- The Market For Your Property Type is Soft – Many real estate markets have recovered after a prolonged soft market. However it is important to realize that the market forces that drive value for your property may not be the same as what drives other property types. Perhaps the single-family residential market is strong in your neighborhood. Yet, your retail property has not appreciated. Most likely, the retail market has seen rising inventories and vacancies accompanied by decreasing rents and a lack of planned development. Signs like these indicate a soft market, even if other property types in the neighborhood are thriving.
- Cost Does Not Equal Value– This is a common issue with property owners who have invested capital in property improvements. Perhaps your property does not conform to market standards within your neighborhood. It may be over-improved and the typical market participant may not be willing to pay for the excessive improvement. In other words, the cost of the improvements may not equal the increase in value by that amount. It could be more, less, or the same.
- Sales in Your Neighborhood May Not Be What They Appear– It is always important to ensure that “typical” market forces are in place when a sale commences. If I buy a property from someone who offers favorable financing (meaning I will pay less for interest and points than if I had gotten a bank loan), then perhaps I would be willing to pay more for a property than what it is worth. On the other hand, if the seller is in a financial bind, he/she might be willing to let their property go for under-market prices. And, let’s face it, people sometimes can be less-than honest when it comes to what their property sold for. That is why it is important to have all of the facts when considering a neighborhood sale as a comparable sale to your property. Don’t automatically assume your property is worth the sales price of neighborhood properties.
- Using the Tax Assessment to Indicate Market Value– In most cases, the tax assessor’s assessment will lag current market conditions. Also, assessors do not individually appraise each property, rather they do what is called a mass appraisal, which is an appraisal of groups of properties as of a given date using standardized procedures and statistical testing. So, while looking at your assessed value is not a bad idea in terms of benchmarking, it is not an accurate indicator of current fair market value.
- The Real Estate Appraiser May Not Know Your Market– Unfortunately, this does occur occasionally. If the appraiser has skipped sales within the neighborhood for no apparent reason, or has ignored factors which could affect property value (proximity to good schools, high vacancy or high crime areas, etc), it may be a good indication that the appraiser does not know the market, or has not taken the time to research it before rendering a value. It is always a good idea to ask the appraiser about geographic or propetty-type competency before hiring him/her to appraise your property.
These are not the only reason that your property may not have appraised for what you thought it should. However hopefully this illuminates some of the elements of good appraisers and appraisals, and can act as a guide to better understand the appraisal process.
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