Appraisals are essential for real estate transactions, from buying and selling a home to refinancing or settling an estate. They often determine the success of the dealing, and a low appraisal can be synonymous with the deal falling through entirely and the owners going back to the drawing board. Therefore, it is no surprise that many homeowners are anxious when a property appraisal is required.
A home appraisal is a process through which a licensed third-party real estate appraiser reviews the property and gives their opinion of value after comparing it to similar properties in the area. Many of the factors weighing in the home appraisal are objective and, in many cases, outside of the property owner’s influence. It includes the age of the house, size, the condition of the property, the quality of the material used in the construction, amenities such as a garage, outdoor living space, fireplace, and so on.
Since location is the most important value factor in real estate, appraisers typically use properties sold recently in the same neighborhood – or town for more rural properties. The housing market mainly determines the house’s value, and appraisers compare the place to other similar homes that sold recently.
However, in some cases, homeowners are surprised to find that their property does not appraise as high as expected. Here are seven factors you may not have thought about that could affect your home appraisal.
Number of bedrooms and bathrooms
The number of bedrooms and bathrooms is one of the factors appraisers consider when choosing comparables. However, the definition of bedrooms and bathrooms may surprise you. To be legally considered a bedroom, a room must include a closet. Many homeowners use them as a bedroom regardless, especially if the house is small, and real estate agents often advertise them as such. However, an appraiser will not include closet-less rooms in the bedroom count. In addition, appraisers do not include bedrooms that require passing through another bedroom for access, which is sometimes the case in older homes.
Since appraisers must use comparables with the same number of legal bedrooms, it may affect the home value. It is often the case for homes that have only one or two legal bedrooms, especially if they are rare in the area.
“Unique” properties
It may feel good to be the owner of a unique home in many cases – whether it is unusual architecture, history, or luxurious features. Unfortunately, it is not always the case for home appraisals. Appraisers try, as best as possible, to stick to the same area to find comparable properties since location is the most critical valuation factor when it comes to real estate. However, they may need to go far out of the way if you are the proud owner of a reproduction medieval castle in a neighborhood constituted of otherwise typical two-story homes.
Appraisers may use alternative valuation methods for highly unique properties. For example, they may use a cost approach (which estimates the value of the building – including depreciation – and the land it stands on) for a very customized property or unusual constructions like berm homes. However, the appraisal may not be as accurate since there is no guarantee that the average buyer would be willing to pay extra for the features. In other words: it does not pay off to be the best house in the neighborhood.
Permitting issues
Homeowners may be tempted to make arrangements so their property better fits their lifestyle. In some cases, especially if they are handy and the improvements are relatively minor, they may be tempted to bypass permitting entirely. It may be a small project, like adding a deck or finishing a basement, or more significant – such as adding a rental unit.
Unfortunately, appraisers can only consider legal improvements when evaluating the property. If you did not pull a building permit for that tiny extra bathroom or patio, they would not be included in the appraisal. If you own a house with unpermitted work, your best move is often to try and pull permits retroactively. Otherwise, a failed appraisal is only the beginning of your problems. For example, your mortgage lender may require you to repay the loan immediately, and you may lose your home insurance.
Property location
When it comes to real estate, the three most important elements are location, location, and location. Therefore, it is no surprise that it is also the most significant factor that appraisers take into consideration during the valuation process. It includes your general neighborhood and city, where your lot is located, and if any factors would affect its value in the immediate area.
For example, a working factory or power lines would affect the occupants’ quality of life and, therefore, the property’s appraised value. If the house is in a flood zone, it may also be the case if you need to contract special insurance.
Square footage allocation
Size is obviously a factor when it comes to home appraisals. However, the appraiser will consider living space differently whether it is located above or below ground. A finished basement may have the same functionality as above-ground living space, especially if there is plenty of daylight and sufficient ceiling space. However, it does not have the same value in a home appraisal.
The square footage allocation often surprises owners of split-level homes, such as raised ranches, since only the top level is considered in above-grade square footage. It could also affect the number of bedrooms and bathrooms if some are on the lower level.
Housing market
Market comparison is the most common valuation method for single-family home appraisals. If the market is a sellers’ market and property prices are going up, owners expect their home value to go up accordingly. Unfortunately, appraisals can be slow to catch up to a rapidly increasing market, especially if property prices are climbing quickly due to bidding wars and above asking price sales – as is the case in today’s market.
Home appraisers take completed past sales into consideration when choosing their comparables. Although the house may be under contract for a higher price than similar homes that recently sold, the house may not appraise up, and would-be buyers should be ready to bridge the difference or lose the home.
