Last week we outlined how home appraisers
gather and measure
the qualities of a house based on its neighborhood, site, and home improvements.
Now we will try to explain how they use visual impressions and hard information
to determine the market value of a home
As was stated earlier, the appraiser reaches a value through three methods.
The first is the cost approach - what would it cost to
replicate the house in its current location? The second is the Sales
Comparison Analysis. The third, the income method,
is typically used only if the home is in an area with a lot of rental properties.
The cost approach is a best estimate of what it would take to replace the existing
structure at current market rates. Appraisers first assign a value to the lot
or site on which the home is situated. In the case of our $145,000 example,
the 19,780 square foot site is valued at $30,500 based on current sales of both
vacant and improved land. Our example reflects the abundance of local land available.
In the more congested Northeast and in California it is not unusual to find
a desirable site valued far higher than the house itself.
With the value of the site established, the appraiser uses data compiled by
publishers such as Marshall & Swift and information from local
builders to arrive at a reproduction cost on a per square foot (psf) basis.
This is done separately for the heated and (if relevant) air conditioned portion
of the house (1,845 square feet in our example) and, for any garages, porches,
or patios. The psf value is a figure reflecting local labor and material costs
and the quality of the structure being reproduced. Our example is slightly above
average in terms of construction and material; the porch is a pre-fab on a concrete
slab, and the garage is pretty typical of most garages. The appraiser calculated
a replacement cost of $70.50 psf for the house and 25.50 for the porch and garage.
This results in a replacement cost of $130,073 (1845 x 70.50) for the house
and $18,550 for the enclosed porch and a couple of small unenclosed porch/patio
areas and $13,158 for the 516 sq. ft garage for a total value (excluding site)
Next the appraiser depreciates the value of the existing house -
in our example this is done using the Age/Life Method. Our
house was given a 60 year life expectancy and a remaining life was determined.
The appraiser considers age and condition (as well as a little "gut instinct"
according to an appraiser we interviewed.) Our subject is 38 years old and was
assigned a remaining usable life of 40 years. Based on this, the improvements
were depreciated 33% or $53,388 leaving a depreciated value of $108,393.
Add back in the value of the lot and $7,500 "as is" value of site
improvements (landscaping, fencing, outbuildings) and the cost approach yields
a value of $146,393.
The second and more important method used by appraisers is the comparison analysis.
Appraisers identify homes that have sold recently in the "neighborhood."
Lenders generally expect appraisals that analyze three comparables, although
unusual properties might require more. Proximity is the key to good comparables,
proximity in both timing and location. The ideal is to use sales that have concluded
within six months of the appraisal and within one mile of the subject property.
In rural areas or in those with a slow moving market, meeting both of these
goals, maybe even one, can be difficult. The use of comparables is also problematic
when dealing with a very unique property. Fortunately, our example was very
The appraiser identified four very similar properties, all within .07 mile
of our subject. Two of them had sold outside of the six month parameter (exactly
eight months in both cases), one had closed only a few days before the appraisal,
and one two months earlier. Average time on market in the subject area is four
to six months so eight-month old comparables are reasonable. In a fast moving
and rapidly appreciating market like Boston or Las Vegas, an appraiser would
find it tough to justify comparables that were more than two or three months
old and, were they used, would have to adjust values to reflect appreciation.
Properties are then evaluated on a list of criteria. Those that are not instantly
Sales or financing concessions: did the seller agree to perform repairs on
the property or offer inducements like paying closing costs or carrying first
or second mortgage financing?.
Leaseholds (this identifies properties that may have a legal basis different
from the subject.)
Functional utility: Is the property inhabitable? Might it have a higher and
In each of these categories our four properties were identical; there were
no sales or financing concessions or premiums, all were sold on a fee
simple basis and had good functional utility. There were other criteria that
we eliminated from the chart below because of space: basement, none of our homes
had one; heating or cooling (all had central heat and air), quality of construction
(good) and quality of construction ("good" in each case.) Also because
of space, we included only two of the four comparables, the two that differed
the most from the subject property.
||Superior / Remodeled
|Above Grade Room
||Tot / BR / BA
7 3 2
|Tot / BR / BA
8 3 2
||Tot / BR / BA
9 4 2
|Gross Living Area
|Garage / Carport
||2 car carport
|Porch, patio, deck, FP
||Enc. Porch, Patio, FP
||Scr. Porch, FP
||Patio, 2 Porches, FP
|Fence, pool, etc.
|Net (total) adjustment
|Adjusted Sales Price
For each of the criteria above, the appraiser can make adjustments but note that
the adjustments are made to the comparable, not to the subject. At first glance
this is very confusing. Understand that the appraiser's goal is to make
the properties as equal as possible. He does this by determining what the comparable
might have sold for had it had an enclosed porch or lacked a garage; had it been
500 sq. ft smaller or had a better view. This is an exercise to take one property
without a sales history and make it equal to two or more properties which have
proven their value on the open market.
In our home appraisal example, Comparable #2 had been remodeled
while the subject was in pretty much pristine 1966 condition. Therefore the
appraiser subtracted $5,000 from the comparable, effectively removing the remodeling
from the equation. There was substantial variation in the square footage of
the house so comparables were adjusted up or down at the rate of $20 per foot.
Comparable #2 slightly smaller than the subject so $440 was added (thus tacking
on another 22 square feet) while Comp #3 was debited $11,000 to negate the value
of its substantially larger footprint.
Remember, the cost approach had yielded a psf replacement value of $70.50 and
the comparables had sold at a psf price ranging from $63 to $86. Our appraiser
said that the $20 has nothing to do with either of the other calculations. It
is more a measure of impact. Buyers do not attach that much value to actual
measurements, assuming the size meets their needs.
There was also no adjustment for number of rooms and bedrooms even though the
houses ranged from six to nine rooms and had either two or three bedrooms. All
had two baths. If one of the houses had only two bedrooms or one bath, there
probably would have been a substantial adjustment.
Note also that there was no adjustment for the much larger lot that the subject
property sits on. Again, each lot was a reasonable size for the area, no subdividing
is possible, and land in the area is not a particularly valuable commodity.
These homes are in a coastal area and in a subdivision with some spectacular
water and marsh views. Each of the comps, however, was on an
interior lot with a view only of other houses. If a marsh front lot was in the
mix, there would be a substantial adjustment for "view".
After all adjustments are made, the net adjustment is added or subtracted from
the comparable sales price. In this case Comp #1 was adjusted
to a sales price of $152,940 and Comp #2 to $142,305. The other two comps not
included in our chart were adjusted to $139,500 and $145,440. The appraiser
then averages the four adjusted prices to arrive at a value of $145,046, rounded
to $145,000. This is very close to the slightly higher cost approach which provided
substantiation and, since the sales approach is considered the more reliable,
the appraiser concluded the value was $145,000. If there had been a wide discrepancy
between the two numbers, the appraiser would probably have done further reconciliation
to factor in the cost figure.