By Carole Hawkins, [email protected]
There’s a TV game show where teams compete to guess the most popular answer to a survey question. Name something you put on a pizza; name something people mistake for a UFO.
It’s the same kind of principle appraisers use to value a home.
“It’s not about what you or I or a Realtor think the home is worth,” said Jacksonville real estate appraiser Keith Howard. “It’s what the market thinks — the buyers and the sellers.”
Getting inside the heads of appraisers can help Realtors set better prices for sellers and negotiate fairer deals for buyers, said Carol Zingone, who works for Berkshire Hathaway HomeServices Florida Network Realty.
“It’s something you get better at the more you do it,” she said.
Zingone is president of the Women’s Council of Realtors, which hosted Howard and fellow appraiser Donnie Wright at the group’s February business meeting.
Appraisers offer a neutral, third-party opinion on what a home is worth.
The profession is heavily regulated by state and federal agencies. Howard himself maintains a library of reference books that, if stacked floor to ceiling, would reach nine feet high.
An appraisal is not the same thing as a broker’s price opinion. The broker is a client advocate –– she can suggest whatever price she wants to.
But don’t expect the contract to go through if you haven’t done your homework, Howard said. A market analysis is critical, not just a gut reaction.
“I’ve had Realtors say, ‘I just knew what I could sell that house for.’ And they’ve got no data to support it,” he said.
Home valuations begin with comps — homes in the neighborhood with similar characteristics that sold recently.
Realtors learn that means homes sold within the last six months and within one mile of the listing. But not all comps are created equal.
Some Realtors believe, as the market heats up, appraisals will come in low because the comps are backward-looking. It’s a justification Realtors may use to overprice a home, said Wright.
“That’s a disconnect,” he said. “We’re not using old comps, because most neighborhoods have enough comps that are recent — within three to six months — to justify a price.”
Comps do become more confusing, though, when a neighborhood has a lot of REOs, Howard said.
Appraisers won’t use most REOs when setting a value because the homes were sold by motivated sellers and don’t reflect market value, he said.
On the flip side, does that mean market value is equal to the neighborhood comps minus its REO sales? Not necessarily.
For example, Howard said, REO homes sold through Fannie Mae’s HomePath program are sometimes fixed up — with fresh paint, new carpet and new appliances.
“You have two different types of REO situations –– one with financial distress, one with physical distress,” he said.
A more useful way to think about it is, what does a buyer see when he walks through the house, Howard said.
“As a buyer, I’m going to start counting deficiencies. I’m going to start calculating in my head how much those deficiencies are going to cost me to get corrected,” he said.
The buyer will look at sales of nearby homes and subtract for those deficiencies.
In a perfect world, the home’s value should be the value of the updated and maintained homes that sold minus the cost of repairs on the home that’s listed.
But, the world’s not perfect, Howard said. The market doesn’t respond dollar-for-dollar to what an upgrade or repair costs.
Wright said a homeowner may put in a $20,000 wood floor. But to a buyer, it’s still just a wood floor.
“At $20,000, you might have gotten ripped off for that floor,” Wright said. The value is the market’s reaction to a thing, Howard said, not its cost.
For example, two houses might be identical, down to the blades of grass in the yard. Except one has a pool and the other does not.
The house with the pool sold for $110,000. The one without, for $100,000.
The market reaction to the pool is $10,000, because that’s how much more a buyer would pay for it.
“It may be an awesome pool,” Howard said. “The seller may have spent $50,000 on that awesome pool. And it cost him $50,000, he wrote that check.”
But as far as the market is concerned, it’s still only worth $10,000 more.
It’s called paired analysis and appraisers use that reasoning when making an adjustment to a home’s value — correcting price for a characteristic that makes a home different from the comps.
Wright and Howard also used paired analysis to answer a question at Women’s Council about whether a golf course lot should sell for a premium, Zingone said. Going back several years, appraisers pair sales between similar homes, and note the percentage difference in price between homes on and off the golf course. Zingone was impressed.
“I’ve been in the business 11 years, and it’s the first time I’ve heard that,” she said.