Want to know how Phoenix and Scottsdale Home appraisals are done?
One of the most important parts yet least understood part of the home purchase process is; How home appraisals are actually formulated. Home appraisals are ordered for three primary reasons.
1. A Phoenix homeowner is refinancing a previous home loan on a property and the new lender requires an updated appraisal; or a new lender needs an appraisal done for a new loan.
2. A home buyer is purchasing a home and the bank requires an 'appraisal' in order to establish value and approve the loan based on the value of the security.
3. The third most common appraisal is ordered independently by the home-owner to determine a home’s true market value prior to placing the home on market for sale.
In the first two scenarios; it is the lenders primary goal to be assured they have a “valuable security” in the event of default. Not just a valuable security but one that gives them a security ratio that meets their guidelines. If the borrower is qualified for an $800,000 loan on a $1,000,000 property (an 80/20), the lender/note holder wants confirmation the Scottsdale or Phoenix Home for sale and being purchased by their borrower is in fact worth $1,000,000.
So let’s get to it! How home appraisals are formulated? The myths and the facts in any home appraisal, the appraiser’s goal is to first, compare similar “sold” properties with the “subject” property (The Phoenix home for sale) and then make 'feature value adjustments’ up or down based on the plus or minus attributes of subject property vs. the properties being compared. Seems easy enough right? Well it is not so cut in dry in the luxury market of Paradise Valley, Scottsdale or Arcadia, Arizona.
Here is the primary difference. In tract home communities where there are three or four floor-plans, most of the homes are on similar lots, with similar features, minor adjustments might be made for a home with granite counter tops verses Formica. In addition because the price range in tract communities is usually so much less, the value adjustments are less pronounced. For example, if a subject property (home being appraised) is the same size as a home that sold two weeks ago, on the same size lot, built the same year, neither home with a pool; however one home had upgraded counter tops in kitchen and bathrooms. The appraiser may make a line item adjustment as a plus for the subject property of $5,000.00. If the comparable home sold for $350,000, the additional upgrade of the granite might allow the subject property to be appraised for $355.000.
If it still seems easy, clear cut, it’s not and it gets more complicated as we move up to luxury homes. For this reason, there are appraisers certified to do appraisals on properties valued at over a million dollars. Below is an example of why there are appraisers certified for luxury homes and this is where it gets interesting. Appraisals are done in the luxury market is fundamentally the same way as tract communities, for example the value comparison of properties in very close proximity, size, age, condition, lot size, views, gated vs. non gated, pool, no pool, age range, size range, etc. However the stakes and feature variables carry substantially more weight and vary dramatically in the luxury home real estate market.
Not only do the standard variables carry more weight but features NOT as easily jotted down on a standardized form, have a significant impact on value.
For example, the actual over-all presence of a home, how finishes are installed and feel of construction, design and floor-plan must be considered. In the luxury real estate market, particularly in Paradise Valley, we may see (2) 6500 square foot homes; both built same years, same size lots etc. However from a personal perspective, you may enter one of these homes and it may feel and look absolutely breathtaking whereas the other may feel like an oversized tract home.
So, what is the “luxury market value? How the fit, finish and presence justified/quantified on a piece of paper? Can the luxury home appraiser check the adjustment box “breathtaking”? No, they cannot. As an interesting note here; even if I were to itemize the finishes on the “appraisal” the homes may sound equal. Both may have marble, hardwood, etc. but again, the application, design and presence of one may make the luxury subject property’s market value (to the savvy luxury buyer) a million dollars more. Having subjective variables like these carrying so much weight in the luxury real estate market. Qualified l luxury appraisers must be allowed to submit appraisals with a very high degree of manipulation. There are so many variables factored into the value of a luxury home. I could write entire articles on any single value adjustment on luxury home appraisals. For example “Views”.
‘View' value assessment’ alone could be a book, especially in homes for sale in Scottsdale and Paradise Valley.
Don’t get me started I have been working as a Realtor specializing in Luxury Homes for a number of years. I’ve learned a thing or two… rather a book or two about luxury homes. One of the most interesting facts to me is, one of the most significant features affecting a Luxury Home’s value is not typically part of the appraisal. This single feature can affect up to 35% of a luxury home’s market value. Yet little or no value is given to it on the appraisal. There is limited space here to review details but please free to call me to find out what that value adjustment is.
Let's get to a real life example of how appraisals work and how they can be manipulated. BTW, as I write this article I am not placing any judgement whatsoever on the ability of appraisers to manipulate an appraisal. However, to educate and dispel the myth that appraisal’s represent supreme value accuracy. I am here to share; home appraisals are simply a science of opinion. And depending on the experience of appraiser, the purpose of appraisal, the “intent” of appraiser; the completed appraisal for the same luxury home can vary dramatically.
Let me share a recent real life example.
I had a buyer interested in an exclusive pocket listing of mine in Paradise Valley. The seller said he would be happy to sell his home for “appraised value”. I said, “great” the buyer would be happy to pay “true market value” which should translate to “market value” “appraised value' should be what others buyers paid for similar size, age, featured homes in the same community.
To make sure the seller felt 100% comfortable with market value, I provided the names of three very experienced Paradise Valley appraisers. I further suggested that the seller, “interview the different appraisers and “pick the most experienced Paradise Valley appraiser, with whom they felt most comfortable”. I offered “That I would need not information on whom they selected”.
Here’s what happened…
10 days later I receive the appraisal from an appraiser based in central Phoenix. Not an appraiser specializing or intimately familiar with Paradise Valley homes for sale or the sold homes in Paradise Valley. The appraisal came in approximately $125,000.00 OVER true market value. (I know this because that home later sold after 202 days on market for 125,000 less than appraisal)
You ask, how did that happen? First we have go back to the cornerstone of any appraisal which should be “like properties” with adjustments according to the “public's cash value assessment of attributes or negatives.”
Let’s look first at seller’s subject property.
The seller’s subject property was very dated with very basic finishes, condition was a '5', the yard had virtually no landscape and the pool was in a very odd location. All of these issues were fine with the buyers… again as long as they paid market value. However, the appraiser did not use “like home comparable”. The appraiser used homes that “penciled out” as ‘like homes comparable’ i.e. same age range, similar square footage etc. but on other points the homes were not equal.
So rather than use all the sales in the last six months of equal, similar, condition, finishes, yards, age, size homes which sold for between 1.45 million and 1.575 million. The appraiser used “sold’ homes that matched only the subject property’s base attributes, age and size but were superior in all other areas. In this manner, the appraiser was able to adjust the subject properties ‘appraised’ value UP by matching only the base criteria i.e. size and age homes and then using sold homes that were perfection, beautifully remodeled, gorgeous yards, landscape, condition '9', impressive entries and interiors. In addition to support the two impressive “sold’ homes; the appraiser used “active listings” to also support what the subject home might sell for. The application of ‘active listings ‘is part of standard ‘ home appraisals’ however, the appraiser used the most expensive “active listings “then made an adjustment downward from a “high point” rather than using comparable homes that were more reflective of the subject property. So the appraiser manipulated the standards allowing for a higher appraised “market value”. Did the appraiser technically do anything wrong? Actually not, technically, by guidelines she followed the rules. Was the finished ‘appraisal’ accurate or reflective of the homes actual market value? The answer was a resounding “no”. Did the buyers purchase the home? Again the answer was “no”. My recommendation when ordering an independent appraisal is:
1. Make sure to use an appraiser very familiar with the area.
2. If you are appraising a luxury property make sure to use an appraiser certified to do million dollar plus homes.
3. Make sure the appraiser knows you are looking for an accurate, fair market value appraisal. Home appraisals can be very much how politicians play with numbers, you can manipulate numbers in ways to make your point. So make sure your appraiser does not "play" with the numbers. There are so many features that factor into a buyer’s value decision for a home. The very best most experienced Realtors have the knowledge to quantify those numbers into a reasonable range price when considering a purchase offer. Or assist in determining market value in order to sell a luxury home for the highest price. Please note I said the "Very Best Realtors" I did not say, check with your friendly local real estate agent or your friend with a real estate license.
To learn more about the real estate market, luxury home finds, real estate trends, the best buys in this market, your home’s value in Paradise Valley, Scottsdale and Arcadia, please feel free to call me, I am always happy to discuss real estate.
Michael Chaisson, Realtor
480.450.4632
Russ Lyon Sotheby's International Realty
Premier Client Services Ranked Top 1% Nationally
Circle of 26 Excellence Award Recipient
Bonus Points
*Although all home appraisals are now supposed to be arm’s length transactions and lenders are not supposed to be able have any influence on the appraisals. Laws instituted as result of the 2007-2009 financial crisis. Lenders are required to order appraisals through “independent appraisal management companies” Oddly enough Wells Fargo bank owns one of the largest independent appraisal management companies.
*Appraisers do not base any value adjustments based on what those improvements may have cost the home seller. Consult a Realtor to see what value may be added by improving one or more aspects of your home.
