Home Real Estate The Real Estate  Appraisal Explained

The Real Estate  Appraisal Explained



With the Heber-Overgaard market outpacing anything we’ve seen since the 2008-2009 downturn (housing units sold in the first five months of this year compared with last are up 63% and land units sold for the same period are up 129%!), sellers are finally seeing the market turn in their favor.  However, as is typical in a rising market, even though buyers may be willing to pay a certain price for a property, the real estate appraisal can be problematic in the real estate transaction if it doesn’t meet the contract price.


A real estate appraisal is an “opinion” of value for a property made by an independent third party unrelated to the transaction.  Appraisals are required by lenders to ensure the mortgage they’re making on a property does not exceed the property’s value in the current market.  Appraisals are not required in cash transactions; however, the cash buyer does have the choice to have an appraisal completed on a property he/she is purchasing, although few of these buyers choose to pay an appraiser $450 – $500 to tell them what a property is worth.


In our Arizona Residential Resale Real Estate Purchase Contract, an appraisal contingency exists for all financed transactions; i.e., the property must appraise for at least the contract price for the lender to loan on the property.  If the appraisal falls short, there are four options for the parties to the transaction:  1) the buyer asks the seller to reduce the price of the property to the appraised value (most common request by the buyer, but not always agreeable to the seller), 2) the buyer and seller negotiate a number between the appraised value and the contract price, with each party absorbing a portion of the difference, 3) the buyer pays the difference between the appraised value and the contract price or 4) the buyer may cancel the purchase contract with no harm, no foul.  For cash buyers, the appraisal contingency does not exist in our Purchase Contract, although it can be written in.


Typically, an appraiser will select at least three sales within the past six months of similar properties to use in his/her analysis.  With no two homes being identical, particularly in our market where tract homes are the exception rather than the rule, the appraiser must make adjustments to the values of the comparable sales to account for the differences between the comps and the subject property (for example, square feet, condition, location, amenities, etc.).  Appraisers have the difficult task of determining what the values are for those differences.  Most residential appraisers use the market approach in their analysis, which requires knowledge and experience of local market conditions.  By its very nature, the market approach is subjective; hence, the appraisal being defined as “an opinion of value.”


Sometimes in rising, fast-paced markets, the appraisals may not keep pace with the increases occurring within the market.  Because appraisers look at previous sales data to derive current market values, we sometimes find the appraised value coming up short in our real estate transactions.  Again, a knowledgeable and experienced appraiser can help alleviate this problem.


Here are a few myths about the appraisal process that most buyers and sellers aren’t aware of:

  • An appraisal is equivalent to a home inspection.  Not true.  The home inspector inspects a home to inform a buyer of any existing or potential issues with the property, while an appraiser inspects the home to derive an objective market value for the property.
  • The appraiser works for the buyer.  Again, not true.  While the buyer typically pays for the appraisal, it is the lender who hires the appraiser to conduct an independent valuation of the property.  Even though appraisers are hired by the lender, they “are trained to be unbiased and ethical. In fact, it’s a crime to coerce or put any pressure on an appraiser to hit a certain value.”
  • The appraised value is representative of what a buyer is willing to pay for a property.  Again, not true.  Remember, the appraisal is “an opinion of value” and as such is subjective; it doesn’t determine what a buyer would be willing to pay for a property, nor what a seller would be willing to accept.
  • The larger the property, the higher the appraisal.  Again, not necessarily so.  What if a seller’s home is overbuilt for the neighborhood?  That is, what if the subject property is much larger than any other homes in the neighborhood.  The value is measured as if it were similar to other homes in the area, which may be a detriment to the larger home’s valuation.
  • The more upgrades, the higher the appraisal.  Just as with a larger property, an over-improved property may not command the dollars spent on the improvements.  For example, a home with a plush home theatre in a neighborhood of homes where no other properties have such an upgrade, may not return the value spent on the improvement.
  • All upgrades are created equal.  Nope.  For example, converting a garage for that in-law suite or a workout area may not garner you much added value if the surrounding homes all have garages.  “Your house has a garage for a reason,” points out Austin Fernald, a home appraiser in Orange County, CA. “Most people want to park their cars where they are safely protected from the elements and break-ins,” he says.  To convert a garage to added living space may actually devalue your home.


So, whether you’re a buyer or a seller, when you enter into a financed real estate transaction, be prepared to deal with an appraisal on the property.  Doing your homework in advance by having a knowledgeable real estate professional provide you an analysis of your property’s worth can illuminate issues during the transaction process.


If you’d like to know what your property is worth in today’s market with no hassles and no obligation, please contact one of our Dominion Group Properties’ Real Estate Professionals at 928.468.3232 or visit us at our Bison Ranch office in Overgaard.  Learn more about us at www.dgp-az.com. We at Dominion Group Properties are Your Rim Country Real Estate Professionals!


Source: 6 Home Appraisal Myths You Need to Stop Believing Immediately; By Cathie Ericson | May 3, 2017

Stephen Yost, California Certified Appraiser, 1985 – 1998

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Stephen has been a full-time Realtor since 1998 and an Associate Broker since 2009. During his real estate career, Stephen has assisted buyers and sellers with purchases and sales ranging from $30,000 to $1.5 million and everything in between. He is known for his use of cutting-edge technology, including his 24/7 Virtual Open House DVD, when assisting his clients. Stephen's advanced Realtor designations include Accredited Buyer's Representative (ABR), At Home With Diversity (AHWS) and Certified Short Sale Negotiator (CSSN). Stephen also holds a Bachelor Of Science Degree in Business Administration (Accounting) from the California State University system. Additionally he is a member of the National Association Of Realtors, Arizona Association Of Realtors, White Mountain Association Of Realtors and Scottsdale Area Association Of Realtors, as well as a member of the Overgaard Ponderosa Lion's Club. Stephen is a full-time resident of Overgaard. He says "I feel like I'm living a dream - getting to live in the mountains of northeastern Arizona and making a living doing what I love - helping my clients achieve their dreams!" For more information about Stephen's buyer and seller services, and a FREE copy of his exclusive Home Buyer or Home Seller Handbooks, call him at 480.703.7990 or e-mail him at Stephen@WhiteMountainLuxuryHomes.com. To visit his website and to preview his listings, please log on to WhiteMountainLuxuryHomes.com.