Frequently Asked Questions

How Much Is a Fireplace and Mantle Worth in an Appraisal? (or other minor feature)

2013-02-07T11:31:00.000-08:00

Given our high home prices and varied property types, those items are often too small of a factor to isolate and determine the value of. We use what is called paired sales analysis to determine the contributing value of features starting from the most value influential to the least. What generally happens is that a fireplace and mantle would be lumped together in a total quality adjustment with flooring, counter tops, etc., and another property with similar overall quality, but not identical, is compared equally. To determine the value influence of a fireplace and mantle, we would need to have two otherwise very similar properties that have sold, one with the fireplace and mantle, and one without them. To make matters more difficult, Realtors often won't even describe such things, much less include pictures.

It is important to understand that the appraised value is the most probable price a property will sell for, not the exact price, the highest possible price, or the lowest likely price a property will sell for. As such, there is likely always someone who will pay more or less for a property than its appraised value. Same is true of the fireplace and mantle. Some people will pay more for it, some want to choose their own style and think of them neutrally, and some could care less if they are there and apply no value. As such a small influence compared with the overall value of homes in our area, trying to nail the value of these features by themselves is nearly impossible.

How is the Value of My Home Derived in an Appraisal Report?

2012-06-22T14:50:00.000-07:00

There are three approaches to value that can be used in an appraisal report. The appraiser will choose the approach(es) that best reflect the actions of buyers in the market area where the property being appraised is located.
The three approaches are:

Sales Comparison Approach to Value. This method of deriving value allows for the most complete satisfaction of the tenets of market value. It compares sales of properties similar to the property being appraised with the intention of producing a value that reflects the actions of recent market participants that may have considered also purchasing the subject property, had it been for sale. The significant majority of the time, this is the approach used for appraisals of single family residences and condominiums in Southern California where sales and information regarding the sales are usually plentiful.
Cost Approach to Value. This method of deriving value calculates the cost of a property's improvements, less depreciation, and adds them to the value of the land as if vacant. Market participants usually make their purchasing and selling decisions based on what properties have been selling for in the area and not on the cost of a property resulting in market value often being significantly different than what is derived in the sales comparison approach to value. The cost approach to value is usually the best option when sales are extremely scarce, which is uncommon in Southern California.
Income Approach to Value. This method of deriving value utilizes the income capabilities of a property to derive a property's market value. In Southern California, property values are often too high and investors/landlords will not see enough profit / reasonable enough of a return from rents to where buying a property based solely on its income producing capabilities equals a value above what the sales comparison approach usually indicates, making it an unreliable indicator of market value for single family residences and condominiums where potential investors are mostly competing with buyers who will live in their properties after purchase and do not consider the profit they could receive from renting their property. The income approach is most usually used for multi-family properties and commercial properties.

In the significant majority of residential appraisals in our market area (and likely throughout the country), property values are derived solely using the Sales Comparison Appraisal to Value which relies on paired sales analysis. Paired sales analysis is a method of estimating the amount of adjustment for the presence or absence of any feature by pairing the sales prices of otherwise similar properties with and without the feature in question. A sufficient number of sales must be found to allow the appraiser to isolate the effect on value of the pertinent factor (also called paired data set analysis and matched pairs analysis). If applied correctly, all comparable properties in a sales comparison should indicate the same value for the property being appraised. Below are three basic examples.

Example 1 – One Different Comparable Feature. Comparable 2 is adjusted -$5,000 because it has a 3 car garage which neither the Subject nor properties 1 or 3 have.

	Subject	Comp 1		Comp 2		Comp 3
Sale Price			$100,000		$105,000		$100,000
Gars	2 Car Gar	2 Car Gar	No Adj	3 Car Gar	-$5,000	2 Car Gar	No Adj
Adj. $ of the Comps			$100,000		$100,000		$100,000

Subject's Market Value = $100,000

Example 2 – Two Different Comparable Features. Comparable 2 is adjusted -$5,000 because it has a 3 car garage, which neither the Subject nor properties 1 or 3 have. Comparable 1 is adjusted -$10,000 because it has a pool which the Subject does not have.

	Subject	Comp 1		Comp 2		Comp 3
Sale Price			$110,000		$105,000		$100,000
Gars	2 Car Gar	2 Car Gar	No Adj	3 Car Gar	-$5,000	2 Car Gar	No Adj
Pool	No Pool	Pool	-$10,000	No Pool	No Adj	No Pool	No Adj
Adj. $ of the Comps			$100,000		$100,000		$100,000

Subject's Market Value = $100,000

Example 3 – Three Different Comparable Features. Comparable 2 is adjusted -$5,000 because it has a 3 car garage, which neither the Subject nor properties 1 or 3 have. Comparable 1 is adjusted -$10,000 because it has a pool which neither the Subject nor Comparables 2 or 3 have. Comparable 1 is adjusted -$5,000 because it has a 100 Sf larger house size than the Subject. Comp 3 is adjusted +$5,000 because it has a 100 Sf smaller house size.

	Subject	Comp 1		Comp 2		Comp 3
Sale Price			$115,000		$105,000		$95,000
Gars	2 Car Gar	2 Car Gar	No Adj	3 Car Gar	-$5,000	2 Car Gar	No Adj
Pool	No Pool	Pool	-$10,000	No Pool	No Adj	No Pool	No Adj
Living Area	1,000 Sf	1,100 Sf	-$5,000	1,000 Sf	No Adj	900 Sf	+$5,000
Adj. $ of the Comps			$100,000		$100,000		$100,000

Subject's Market Value = $100,000

How Much Are Solar Panels Worth in an Appraisal?

2012-02-23T15:06:00.000-08:00

The short answer is that there is no set value, and the value of solar panels in an appraisal are dependent on the neighborhood. They could contribute $0 on up. If solar panels are common features in the neighborhood, or at least not uncommon, then sales may indicate that buyers in a given neighborhood recognize value in solar panels, and the appraiser may be able to derive their contribution of value in an appraisal.

Why is there even a question as to whether solar panels contribute to value? Don't they make money for the owner? Why wouldn't someone want them if they are a net-positive to the homeowner's wallet over time? There is no single reason why people often don't place value on solar panels when purchasing homes, but it is important to understand the motivations of buyers when making purchasing decisions. Often, people buy the most expensive home they can reasonably afford and adding the cost of the solar panels reduces the ability to pay for other features, more land, or a larger house, for example. In other words, there is something else they are often giving up when they chose to buy a home with solar panels. Also, people consider homes as appreciating assets while solar panels are depreciating assets, so the long term value of the solar panels may be not be as clear-cut and worth-while as the common electricity-savings math may suggest.

It is important to understand that an appraisal reflects the most probable price a property will bring in an open and competitive market and not the highest possible price someone will pay, and not the least likely price someone will pay. While there may be a perfect buyer who will pay more for solar panels, appraisers must consider whether such buyers are common enough to be probable.

When do you think the housing market will recover?

2012-02-08T00:54:00.000-08:00

No one knows the answer to this question, unfortunately. But it is important to consider what a recovery means. A recovery to some point in the 2000's? Which point in time?

Many people believe that real estate housing prices move in cycles. But are there cycles, or are there factors causing housing prices increases and decreases? For example, at one point in time the norm was for a family to have a single male wage earner. Then, after a time, there were two wage earners which increased the amount a family could pay for a home, which in turn increased home prices. There were also wage increases, recessions, and periods of national economic growth - all which likely affected housing prices. So perhaps it could be said that there was a catalyst that caused housing prices to go up and down, and not just a natural pattern.

Since most people require a mortgage, and many require a significant portion of a home purchase to be financed, the availability of mortgages and mortgage interest rates have an influence on home prices. For example, if the mortgage interest rate is 8.4%, a $2,000 monthly payment allows a buyer to borrow $263,000. If the mortgage interest rate is 4.07%, a $2,000 month pay allows a buyer to borrow $415,000. In other words, that interest rate difference alone could cause housing prices to increase as much as 58% in this scenario.

Those are the exact interest rates that existed in June of 1994 (8.4%) and October 2011 (4.07%). In June of 1994, the national median new home price sale price was $141,000 and in October of 2011 it was $212,300, an increase of 59% and within 1% of the increased buying power due to low interest rates.

Let me restate, on a national level, the decreased interest rate between June of 1994 and October of 2011 could be cause for an increase in home values within 1% of what the actual home value change was - which means that there may have been no actual home value increases, our dollars just buy more because we can borrow more for the same monthly payment.

During the late 1990's and a little more than half of the 2000's, after mortgage lending rules had become more lax to ensure that certain segments of the population were not being prejudiced against, lending restrictions/rules were reduced, unqualified buyers were allowed to buy homes, unsecured loans for 100% or more of a home's value were commonplace, and mortgage interest rates were regularly decreased to historically low levels. Fraud was rampant, including buyers, Realtors, mortgage brokers, banks, and investors. All of these factors were the catalysts of the housing boom of the 1990's and 2000's, but unlike catalysts such as social change or wage increases, fraud was not sustainable and a significant contraction resulted.

So if low-interest rate mortgages are the cause of current home prices to be greater than they were in 1994, and if increases in home values require a catalyst, there may not be a 'recovery' at all. We may, in fact, be at the appropriate house price level now, given the available interest rate (3.7% average as of June 2012). It may seem short-sighted, but there does not appear to be a new catalyst in site, short of significant foreign investment in American real estate.

So may home prices continue to go down?
That is also unknown, but consider this: Wages have not increased in 15 years and we are experiencing the global equalization of what was once the American workforce, meaning wages are unlikely to increase and may actually decrease. Looking to the future: food, energy, and other resources are going to become much more scarce as global population dramatically increases making the cost of living greater and decreasing the money available to pay for homes. Also, interest rates could rise. While no catalysts for increased home prices are obvious, there are some for a decrease in home values.
Does this mean I shouldn't buy a home?
There are many personal influences that go into that decision that extend beyond home prices, but it seems wise for present day buyers to think of home-ownership long term and not expect to be able to sell the home at a profit, nor expect it to be a retirement vehicle.

What is the best way to choose an appraiser?

2004-04-30T07:31:00.000-07:00

Finding a good appraiser is difficult and can be time consuming, and there is a wide range of appraisal quality available to you. So how the you find the right one? The best thing you can do is call or email several to see who is willing to spend time with you, who has the most thoughtful and knowledgeable answers to your questions, and who makes themselves available to you in a timely manner. Whichever appraiser is the best at all three of three of these is likely your best choice because they are the most likely to provide the same attention and knowledge to your appraisal report.

If you have the time, you could also ask for a sample of their work and evaluate whether the Sales Comparison (the section of the report where the properties are compared with one another) makes logical sense, or if they pick a seemingly random value after presenting several comparable properties. In the significant majority of our appraisals, each comparable property is carefully balanced to indicate a consistent value with the other comparable properties. Very few appraisers take the time or have the capability to do this.

Questions to ask and pitfalls to avoid:

Who will be completing your appraisal report? Some appraisers send trainee appraisers out to inspect properties and/or have them complete the appraisal report. It is important to verify that if you are paying top-dollar, you are getting an experienced appraiser’s expertise and not a trainees.
Be wary of ultra-low appraisal fees. People who offer these tend to be inexperienced and/or and do not spend much time researching and analyzing all available data.

Why should I order an appraisal before I buy a home?

2004-04-29T07:44:00.000-07:00

An appraisal ordered from us provides you with a value opinion from a neutral third party who does not have a stake in the success of your purchase, and who is especially educated and experienced in property valuation, which a Realtor is not. In many instances, Realtors can provide a narrow and reliable value range - but they are often many situations where their techniques fail the test of market value and the buyer spends more than they should, or have to, on a home.

Isn’t a mortgage lender going to order an appraisal? Why do I need another one?

2004-04-28T07:45:00.000-07:00

Yes, but mortgage lending rules require that the mortgage lender supply a copy of the purchase contract to the appraiser which can influence the appraised value. This is because the Definition of Market Value states that a property is worth what a buyer and seller are willing to agree to. An appraiser with a purchase contract in hand has a signed declaration from a buyer and seller for a particular purchase price. In purchases, it almost becomes a situation where the appraiser is left to prove or disprove the purchase price instead of developing their own value opinion.

It is also important to realize that appraisal the mortgage lender orders is for the mortgage lender to make a lending decision from, and to give them assurances that they will be able to sell/trade your loan on the secondary mortgage market. As such, they often have their own restrictions and requirements imposed on the appraiser / appraisal that can influence the appraisal and its value, sometimes to the detriment of the purchaser.

When should I order the appraisal for a purchase?

2004-04-27T07:46:00.001-07:00

It is important to have the appraisal ordered as early in the purchase process as possible. Ideally you would order it before making an offer to purchase a property, but that is not always practical and there are benefits to having a purchase under contract. If you are already under contract, it is important to have an appraisal back from us before you receive one back from your mortgage lender so that the benefits of our appraisal can be maximized. For example, our appraisal can be used to help you exit an above-market purchase price when an appraisal contingency exists in the purchase contract. If the appraisal from the mortgage lender, which is typically influenced by your purchase contract, supports your purchase price, you may not be able to renegotiate the purchase price or exit the purchase because there is contrary evidence.

Other benefits to ordering an appraisal before buying a home.

2004-04-27T07:46:00.000-07:00

If our appraised value in less than the purchase price, the appraisal may be able to be used to negotiate a lower purchase price.
It can help you exit a bad purchase. Usually there are appraisal contingencies with purchases. The appraisal will not only give confidence in your purchase, it may be able to be used to allow the purchase contract to be cancelled.
It may be able to help you acquire a loan that otherwise fails. We have had many situations where the mortgage lender’s appraisal indicates a lower value and our appraisal is used to provide support for a purchase price. Mortgage lenders typically put their own appraisal restrictions and requirements on appraisers which do not allow the appraiser to use the best/most applicable comparable properties and our appraisal can be used to supplement the mortgage lender’s appraisal and enable the loan. There is no guarantee of this, but it has happened.