What Are Appraisals?
These days, a home appraisal is pretty standard for any home that will be bought with a mortgage loan. Why do lenders require an appraisal to get this? If a bank lends you, say, $300,000 to buy a nice home, they want to be certain that home is worth that price tag.
What’s a home worth
Ever thought about the logic behind the value of real estate? Why should a three bedroom home in L.A. cost hundreds of thousands more than a similar three bedroom home in Nashville? It can be disorienting to compare homes, but there’s a method to the madness.
Research and statistics go into determining what a home’s worth. Independent research organizations and government agencies track tons of data regarding the real estate market. Where and what kind of homes are selling, and what people across the country are paying for property.
All Real Estate Is Local
The U.S. is a big country with hundreds of major cities and thousands of small towns, each unique in their own way. What’s going on at the local level often determines what a home’s worth.
Supply and Demand
How many homes are up for sale and how many people are looking to purchase in that area? When there are plenty of homes on the market and few buyers, the prices drop. The opposite occurs when an area is very desirable but not enough homes.
A nice park, trendy retail area or restaurants can be worth more than a similar home that’s further away. School districts have a sizable effect, too. Homes in a top school district often hold their value better in an economic downturn.
Local Comparable Sales
In a neighborhood where homes have sold for more than asking price, a similar home may be able to command an up-sized pricing. This can work also against you. If nearby homes sold for cheap, you may end up with lower bids.
Other Real Estate Value Factors
Unusual features or history, investment or renovation potential may sell a house for more. High interest rates, weak job sector, or tightened requirements for borrowers also come into play sending prices higher or lower.
How Homes Get Their Price Tags
An appraiser considers all the data, records, and local perks to determine price. A lender will require this report to ensure the loan they provide is not worth more than your new home.
Automated Valuation Models
Everything is going high tech these days. You’ve probably used real estate technology without realizing it. Check listing prices online on a big industry website like Zillow? Then you’ve used what’s called an AVM.
An automated valuation model (AVM) can speed up the property appraisal process. It takes time for an appraiser to do research for comp homes that fit specific requirements and longer yet to compile a nice final report that includes charts, graphs, statistics, and maps. With an AVM, all that work can be completed in a few seconds, giving an estimated property valuation to a lender, agent, appraiser, and ultimately you, instantly.
How does an AVM work? They are computer models, so like many programs, a series of algorithms crunch multiple sources of data to answer the query. For an AVM, this means finding online records of comparable home sales and property details, tax assessment data, and pricing trends.
In other words, a number of factors are weighted to give the best valuation estimate possible.
AVMs do have a lot going for them. They are lightning fast and greatly reduce costs for lenders, agents, or appraisers looking for a reliable property estimate. Another thing to feel good about: their valuation models will always be consistent and objective. So you don’t have to worry about whether the computer model has any bias while it’s coming up with your estimate.
AVMs have been around since the 90s, but the models in use today are much more sophisticated than older versions. Current data records are easily accessible online, algorithms are more refined, and the models have shown a strong track record for reliability. Many experts thought the AVMs wouldn’t be able to handle the declining housing market after the recession, but generally, the AVMs response was: “We got this.”
Like anything though, AVMs do have some limitations. The most obvious being that its best feature is also its biggest handicap — with AVMs, there’s no inspection of the property.
While that saves a great deal of time and money, it also means the property valuation is less thorough. There’s no appraiser to verify the square footage, factor in a broken furnace, or make sure a seller isn’t counting a dining room with an air mattress as a fourth bedroom.
Beyond the first-hand inspection, appraisers can more easily catch mistakes in a tax assessment, spot unique trends in a local housing market, and make rational choices from conflicting data. Appraisers can walk brokers through their thought process and the reasoning behind their assessment.
While AVMs haven’t yet replaced the appraisal process altogether, they’ve greatly expanded access to reliable price estimate data for lenders, brokers, and appraisers, not to mention buyers and sellers as well. So enjoy the access to this new technology. But just keep in mind that when it comes to AVMs you’re getting an estimate, which may differ from a more thorough home appraisal.