Appraisal Blog The Realtor’s Guide to Appraisals Part 7: Common Myths About Appraisals

Over the years, we’ve heard it all.  Misunderstandings about the appraisal process are plentiful, and some of those really do affect the way you do business.  So this post will address (albeit briefly) five of the most common myths we’ve heard.  We’ll set the record straight, and give you greater confidence the next time one of these issues comes up!

Myth #1:  Everything impacts value

Contrary to popular belief, not everything affects value, and almost always the cost of an item / upgrade / remodel doesn’t equal it’s value.  Let’s look at a few examples. 

What matters?  Here are a few things to make sure you relay to the appraiser, if they apply to your listing.  The appraiser might not be able to say an exact dollar amount of difference each makes, but they will all likely be considered in the appraiser’s opinions formed during the appraisal process. 

1. Additions –  When was the addition complete?  Who was the contractor?  Was the addition permitted?  What was the total estimated cost of the addition?  Think garages, sun rooms, master bed/bath additions, etc.
2. Major systems – When was the roof, windows, or HVAC replaced?  What about the plumbing or electrical system?  Usually systems don’t return a ton on their investment because they typically replace something that was still contributing value.  For example, if a roof was still in fairly good shape, but was replaced anyway, you first have to consider the loss in value in taking away a useful roof before adding in any value of a new roof.
3. Minor components – when did the homeowner replace flooring or lights, the water heater, or interior doors, etc?
4. Kitchen and baths – what level of updating or remodeling was completed?  Was it just new flooring?  Or was the kitchen gutted to the studs and completely remodeled?  When was this work completed? 

What doesn’t matter so much? Like it or not, not everything a homeowner does to their home is going to make a difference when you go to list it.  Here are a couple things that you don’t really need to tell the appraiser about.

1. Cosmetic improvements, like paint.  Most people paint their home, and most paint right before moving in.  It’s likely the buyers of your listing won’t care that the sellers just painted the walls, because they really don’t like gray, and as soon as they get the keys, they’re gonna slap some color on those walls.  Other items of general home maintenance also don’t affect value that much, as they are generally expected.
    
2. Personal property.  You’d be surprised how many times we hear about the new blinds, or the super-fancy TV hanging on the wall that’ll stay with the home.  Sure, that TV might’ve set you back a couple grand, but it’s not gonna matter when you go to sell.  The same can be said for a nice storage building in the backyard that’s not on a permanent foundation.  If it’s not part of the real estate, an appraiser won’t be able to consider it.

Myth #2:  Whatever a buyer is willing to pay for a home is its market value 

Oh, this is a fun one!  We hear this one on a very regular basis, and usually from homeowners complaining about the appraisal process.  “Well, it doesn’t matter what you say!  I’ve got a buyer willing to pay $275,000 and that’s all I need.  My home’s worth whatever that buyer wants to pay me!”

Not exactly.

Let’s look at the definition of market value from Fannie Mae, which is the definition most appraisers use, especially for purchase transactions.

Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:

• buyer and seller are typically motivated;
• both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
• a reasonable time is allowed for exposure in the open market;
• payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
• the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.

Now, in my opinion, the two most important things to remember from the definition above is that (1) the buyer and seller must be typically motivated.  This means that if any party is acting under duress, or if one party is motivated substantially more or less than another party, the definition of market value is not met.  Some examples include (with some exceptions) REO / foreclosure sales, relocation sales, estate sales, auction sales…or on the buyer’s side… when a buyer is practically forced into making a substantially higher offer on the property due to multiple offers, or possibly when a buyer has to make a very quick decision about purchasing.  

And (2) both parties must be well informed.  If an out-of-town buyer, for example, makes an offer on a home without checking out the neighborhood, or researching local market values, they might not be considered well informed.  If a seller is selling their home and hasn’t consulted an appraiser or Realtor, they are definitely not well-informed.  Now, this doesn’t automatically mean market value isn’t met, but it sure might mean that.

So back to that homeowner’s all-too-common remark.  No, market value isn’t simply what a buyer is willing to pay.  There’s so much more to it than that.

Myth #3:  Price per Square Foot is a good way to price a home

We’ve already discussed adjustments in Chapter 1, and in that discussion, we talked about price per square foot.  So why repeat it here?  Because it’s just that important.

We wrote about appraisal packets in an earlier post too, where you can give the appraiser a list of sales you think might be relevant for the appraisal.  Almost every time I receive one of these packets, the Realtor has written on the MLS sheet $167/sf or $199/sf.  You know what I mean.  You’ve probably done it yourself.  But I cringe every single time I see that.  Why?

As we learned earlier, in my opinion, pricing a home using PPSF is only acceptable when the home is brand new or less than a few years old, and you’re comparing it to model matches – or homes with very few differences.  In these instances, you could easily have several sales all practically identical with the exception of square footage.  And, it would be no problem to extract a median PPSF and apply it to your subject.  

The problem comes in when homes get up in age, and what you’re comparing them to starts becoming less and less like a model match.  Pricing an older home using PPSF isn’t the best idea in the world because that number includes so much more than just price and square footage.  In fact, it includes everything.  Design, age, quality, condition, square footage, bedrooms, bathrooms, interior and exterior amenities and lot size/value, and I’m just scratching the surface!  

So the next time you list a home, feel free to consider PPSF, but only as a starting point.  That is, unless it’s a new/newer home and you have plenty of sales almost identical to the home you’re listing.

Myth #4:  A room has to have a closet to be a bedroom 

No it does not.   Next question.

Ok, I’ll give a little explanation.

Since I’ve already given away the answer, let me explain why the answer is no.  Let’s look at the only requirements for a bedroom:

1. Exits.  A bedroom must have two forms of exit.  The fancy word you’ll see some time is egress which simply means exit.  While the means of exit could be two doors (maybe one interior and one exterior door), we most commonly see one door and one window.  That means that a room with only one door and no windows cannot be considered a bedroom.
   
   Now, before you get all excited, know that there are also requirements for window size.  I found the following to be particularly helpful in breaking down the size requirements.  Just go to:

https://buildingcodetrainer.com/egress-window-requirements/

1. The second thing any room must have to be considered a bedroom is a minimum area & size.  Per the International Residential Code (IRC) – as well as ANSI (measurement standard adopted by Fannie Mae), habitable rooms must have a floor area (square footage) of no less than 70 square feet.  These rooms also must not be less than 7 feet in any horizontal direction.  A 7×10 room will be just fine.  A 5×13 room, however, will not.

But wait!  Having a closet wasn’t listed above?  You mean it’s really not required?

Nope.

And much to the surprise of many Realtors, I’m sure!  The International Residential Code doesn’t mention closets as a requirement for bedrooms.  Keep in mind, however, that your state or local code may in fact have such a requirement.  But most importantly (especially from an appraiser’s perspective) is the market.  What is expected in your market by buyers?  And, even in some markets, that expectation may change, depending on the style or age of the house.  Some older homes don’t have closets at all – or have very few.  I’ve done plenty of appraisals on older homes that if having a closet was a prerequisite for a bedroom, then the house wouldn’t have any bedrooms at all!

Myth #5:  A final inspection can be done in just a day or two.

Most of you are familiar with final inspections.  Either you listed a brand new build, or there were deficiencies that need to be addressed, and after the work was finished, the appraiser was ordered back out to the property.  Most people think this is an easy thing to do, and should be taken care of in just a day or two.  Afterall, the appraiser just has to run out and snap a few pictures, right?

If it were only that easy.

Final inspections usually do take less time on site to complete, and some appraisers can squeeze a final in even if their week is already packed full.  But it could still take several days to over a week to get it all scheduled, inspected, and the report back to the lender.  So the next time you know a final inspection will be required, make the call to the lender early – who will then order the final inspection with the appraiser.  Encourage your clients to let you know that the repairs will be done on XX day, and to give you as much notice as possible.  That way, you can go ahead and get on the appraiser’s calendar and the process should go much quicker for everyone.

Committed to helping you understand your home’s market value,

Ryan Bays, SRA, AI-RRS