What happens at an appraisal - image with camera, grid paper, measuring tape, housesWhen Silicon Valley home buyers purchase real estate using a mortgage or loan, the lender will require that an appraisal be done. (This is true even if you do not have an appraisal contingency.)  The main reason for the appraisal is to protect the bank from the risk of its making a bad investment.  The question being posed is a simple one: is the house, condo, land etc. worth the purchase price?

An appraisal isn’t just a visit to the property, but more of a process. But first, who is the person doing the appraisal?

Is an appraiser another real estate sales person?

A real estate appraiser is a professional with a license specifically targeted for performing this work. It’s not the same as a real estate salesperson’s license. In California, they are regulated by the Bureau of Real Estate Appraisers.

The appraiser must evaluate the target property and arrive at worth based on comparable sales.  (There are other ways of arriving at value.  In the case of income property, for example, it might be important to look at the rent, expenses, cash flow and ratios of several factors to calculate value. Another angle may be replacement cost or cost for rebuilding.)  In most cases, though, comparable sales will be analyzed and this approach will be given the most weight.  We often refer to these as “comps”.

In many cases, the appraiser will do some research before visiting the property (and we real estate agents may email comps or other information ahead of the visit).

Once at the site, he or she will

  • measure to calculate the square footage of the house and garage (living space plus other space)
  • will take photos of the inside and outside of the house or condo plus the street view
  • plot out the basic floor plan of the home
  • verify that there are smoke detectors, carbon monoxide detectors, and water heater strapping as required for health & safety

Please note that no people can be in the images!

Sometimes the appraiser may ask the real estate agent who is present some questions about either the property or the sale.

Often the buyer’s agent will be the access person for the appraiser, but just as frequently it’s the listing agent.  Why should the listing agent take the time when it’s something for the buyer?

As I see it, a low appraisal will hurt my seller clients because it could cause the buyers to bail out or try to renegotiate the price.  For that reason, when I represent the sellers, I like to meet the appraiser and bring comps (or email them ahead of time) to help defend the price.  As the buyer’s agent, I also see risk that my clients may have to come up with more cash if the appraisal falls short, or have some other unhappy remedy such as cancel the same – that’s expensive, as in most cases not only does the appraisal cost a few hundred dollars, but inspections aren’t free either!  For me, I like to go no matter which side of the transaction I’m working.

How long does the appraisal appointment take? When is the report done?

If it’s a tiny condo, the visit may be brief – say 30 minutes.  If it’s a luxury property, it may require more.  Once I met an appraiser at a 5300 SF house and he was there almost 90 minutes. If there is a good floorplan with measurements, such as the type provided by iGuide (that we use on our listings), the visit may be short since the main task will be taking photos rather than measuring everything.

Once all of the notes are taken, the appraiser will later draw out the floorplan of the home on a computer and will look at the comps in depth, adding and subtracting value for various elements (such as view, condition, remodeling etc.).  You won’t get the appraisal value when the appraiser is still at the property. It will take a few days.

Even after the appraisal is turned in, it may not necessarily be over just yet.  The appraisal may need to be reviewed – a process which could be very quick or take a couple of days.  At the review the price may be adjusted downward by the review committee. That is not common but it can happen.

And then it needs to be signed off by whoever is ultimately responsible.

From the time you pay for the appraisal (usually online and with a credit card) to the time when the appraisal is completed and signed off, it may take a week or more.  In some cases, if there’s a “rush” on it (for an extra charge) it may happen within a week.  Recently I heard of one that happened in just a couple of business days.

Which comparable properties will be used?

We never know for sure which properties the appraiser will select. The target is usually within 1 mile, in recent history, within 10% of the square footage, with the same schools, same lot size, and same condition – if possible. Right now inventory and sales are so low that it’s often necessary to go further out, use smaller or larger properties, venture into a different assigned school, or go back longer ago in time than anyone would like. That’s when it is harder to predict which sales would be used.

Something interesting to me is that some appraisers will use pending sale information and others will not. For our buyers we will call the listing agents of the pending sales to try to learn what the sale prices are since those aren’t published but are extremely relevant. The pending sales are a good gauge for market value. Right now, market value is higher than the appraised value in many cases.

Some lenders will ask for both a couple of pending sales and an active listing or two. This is frustrating since the list price at this moment in time is often hundreds of thousands of dollars less than the sale price, sometimes a million dollars or more less.

Appraisal problems

Sometimes there are challenges or problems with the appraisals.

If the required health & safety features are missing, meaning the smoke detectors, carbon monoxide detectors, and water heater strapping & blocking, the appraiser can stop the escrow in its tracks. Be sure to look for those items when you tour the home, and if they are missing, ask your agent to speak with the listing agent about getting it rectified before the appraiser visits the house.

If the property  has significant deferred maintenance, this could negatively impact the property value (even if it’s only surface level and the bones of the home are rock solid).

Sometimes we get a bad appraiser. This is not often, but once in awhile that person will make a significant error. Once I had an all electric condo listing that did not have an attached garage and therefore did not need a carbon monoxide detector. The appraiser was insistent that there be one because she did not know the law. I dug up the code and emailed it in our appeal and it was reversed.

Harder to fix is if they choose poor comparables, or use old ones, or just not adjust the values appropriately. That is frustrating and we can appeal a low appraisal, but not always with success. We do not have control over who the appraiser will be, which comps will be used, or the outcome of the report.

Some of what gets adjusted does not have standard values from one appraiser to another. I’ve seen huge variation for the assigned increase in value for things like pools, views, and even remodeling.

Upfront disclaimers to our clients

When Clair and I work with our buyers and sellers, we explain that we have no say in who the appraiser will be (and neither do the lenders), and just like every other profession out there, they are not all equal in their skills or attention to detail. Clair and I will look at the most recent, similar, nearby sold properties to try to ascertain what a reasonable appraiser would find to be the value. Normally we are right on target. But we have seen them sometime choose properties with poorer locations and equate them or even reverse which location would be preferable or make questionable decisions on what makes various improvements worth a particular amount.

We will do our best to provide useful, accurate information so that appraisers can do their jobs well.

I’ve met so many excellent appraisers over the years and wish I could only work with one of them, but the system does not permit it, unfortunately.



Related Reading

Home inspection vs appraisal

Appraisal value does not equal market value