Randall Thomas, Appraiser and Past President (2013) for Tennessee REALTORS®, joined the RealTea Podcast (Season 2 Episode 4) to answer in-depth questions about appraisals for REALTORS®. 

So how does the appraising process work? Randall stated that lending institutions first go through a third-party appraisal management company (AMC), which then contacts an appraiser to appraise properties after receiving a binding agreement from a REALTOR®. The majority of the appraisals require the appraiser to visit the property in person and evaluate the home both inside and out. Appraisers take several photos of the property and report back what they saw and experienced at the residence.

The quality and condition of the property are the most important factors in an appraisal. Other important factors include health & safety, location, and the environment of the property. To receive financing through Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA) homes must meet the institution’s lending requirements. For example, properties financed through the FHA require handrails if there are a set of steps or if a porch is a certain height above the ground. A property or subdivision’s appraisal may also be affected if it is located in an area with potential risks and hazards, such as a flood zone.

When it comes to factors that increase the value of a property, number of bedrooms is at the top of the list, but what makes a bedroom different from any other room? A bedroom by Fannie Mae, Freddie Mac and FHA’s definition is a room that is at least 73 square feet (or 7″x10″) with two means of escape (door and/or window) and an expectation of privacy. In other words, a room with only one door but no windows does not classify as a bedroom. Rooms that are connected to a bedroom and can only be accessed through that bedroom are not considered bedrooms, regardless of level. Additionally, contrary to popular belief, bedrooms do not require closets in order to meet the criteria of a bedroom, however, it is a common feature in many residences.

Another feature commonly believed to increase a home’s value is a finished basement or attic. A basement is a space that is below grade level and is against the earth. Basements are considered separate from the rest of the home. Finished basements, while a nice space and looks like the rest of the home, are still considered basements and are valued differently. Dens, bathrooms, and any other room at the basement level (such as homes with a split-foyer feature) are still considered to be a part of the basement and are noted in the appraisal report. Whether a basement is considered finished or not is at the appraiser’s discretion because there are no set standards or definitions as to what a finished basement is. For instance, appraisers use their determination as to whether basements with only trusses and joists (no ceiling) are considered a finished basement or not.

Appraisers also evaluate the space outside of the home. Swimming pools built in-ground add value to the appraisal–how much value they add depends on the region of the country the property is located. They may be considered a superadequacy, an improvement that costs more than its contributory value–in some regions. Above-ground swimming pools are considered personal property by lending institutions and do not add value. Freestanding structures and buildings that are not on permanent foundations do not add value to the property either.

Contingencies on contracts may have an impact on appraisal for mortgages, depending on the situation. If a seller has to do major work on the house then it will affect the appraisal. Sales concessions are financial contributions by the seller in order to help the buyer obtain a loan or the property.

It is important to note that having accurate, verifiable information and data is critical in the MLS. Randall notes that the majority of appraisers obtain all of their information from the MLS to do their work. Some information, such as the age of a home, can be verified at the courthouse but information that cannot be verified easily through the courthouse comes from the information provided in the MLS by REALTORS®.

Randall also explained the difference between appraisal value vs. market value. Appraisal value is the value backed upby facts and historical data, whereas market value is what the property should sell for under normal circumstances in the market, without external stimulus involved.

Bias is an issue that sometimes occurs within the appraisal industry nationwide. Randall states that it is crucial for appraisers to appraise the home itself and remain impartial. Do not let bias toward the property’s buyers or sellers influence or determine the appraisal, regardless if it’s favorable or unfavorable.

Randall highly encourages REALTORS® to develop relationships with appraisers. By developing relationships, REALTORS® can refer to appraisers for answers relating to appraisals. He recommends REALTORS® to take courses on appraisals so they have a general idea of appraisals and are able to answer basic questions their clients may askthem.

Key Highlights

  • Lending institutions go through a third-party appraisal management company (AMC), which then contacts an appraiser to appraise properties after they receive a binding agreement from a REALTOR®.
  • Appraisers go on-site to the property to do their evaluations and appraisals most of the time. They take several photos and report their findings and experiences both inside and outside of the property.
  • The quality and condition of the property are the most important factors in an appraisal. Other important factors include health & safety, location, and the environment of property.
  • A bedroom is a room that is at least 73 square feet (or 7″x10″) with two means of escape (door and/or window) and an expectation of privacy. Rooms connected to a bedroom that can only be accessed through that bedroom are not considered bedrooms.
  • A basement is a space that is below grade level and is against the earth. Basements are valued differently from the rest of the home.
  • Any full bathrooms or dens in the basement are still considered to be a part of the basement and are noted in the appraisal report.
  • Built-in swimming pools count towards appraisals. Above-ground swimming pools are considered personal property and are not factored into appraisals.
  • Freestanding structures and buildings that are not on permanent foundations do not add value to the property.
  • Contingencies on contracts may have an impact on appraisal for mortgages, depending on the situation.
  • Having accurate, verifiable information and data is critical in the MLS. Most appraisers get the majority–if not all–of their information through the MLS.
  • Appraisal value is the value backed up by facts and historical data. Market value is what the property should sell for under normal circumstances in the market.
  • Developing relationships with appraisers is strongly recommended. By establishing a relationship with an appraiser, they may be your go-to source to answer any of your appraisal-related questions.

 

Click HERE if you would like to hear the full podcast episode.

 

 

Written by Cindy Yeh