Secrets of a Real Estate Appraisal – Firehill University

Forest Selby: You’ll be surprised how many
real estate agents don’t really understand what an appraisal is or how it’s done. Many think it’s just like the CMA that they
come by and say, “It’s just a bunch of averaging, right? Take a bunch of recent sales, you average
them, and then there’s your price,” or you do some square footage model and you go, “This
is what that sold for. That’s how many…price per square foot it is,”
so you apply that to the new house. Well, that’s not the case at all. Today I’m going to share with you a couple
inside secrets about what an appraisal actually is, how it’s calculated, and a couple things
that you can do to make sure that your appraisal is done accurately. Lastly, a couple little things that most people
think that factor into an appraisal or factor into how much their home is worth, but it
really doesn’t. Okay, appraisal. What is an appraisal? An appraisal is literally an opinion of value
during a specific time. That’s really the definition of it. That’s the book definition, that’s actually
what it is. It’s someone that is doing the appraisal that
is going to give you an opinion of value based based on a number of parameters. These days, most appraisals are done through
Appraisal Management Companies or AMCs, so it’s not usually that local guy that you see
sometimes. Often, it’s some appraiser that the mortgage
company has picked out that is a long way away. They could be driving an hour or two or three
away and coming in to do your appraisal. That presents a couple of challenges. They may not know the area. They may not understand that just because
their square footage and a certain price of a house on this side of the street, that that
same square footage and that same size house equals on the other side of the street or
across town, because we all know that real estate can be micro local meaning that just
on the same side of the street, different address, different zip code, can mean a world
of difference when it comes to value in the marketplace. That’s one of the disadvantages of AMCs. When you understand that, then you see something
that just comes back and the comps don’t look quite right, those are the comparable sales
that they’re using in their inspection report or appraisal report. Once you see those and they don’t match up,
then you can go, “Hey, these don’t match,” and you can go back to your lender and say,
“I don’t think these comps are very valid,” and then you may have a case and they may
issue another appraisal. But, let’s get down to what an appraisal is
and how it is factored. Well, first of all, you have the appraiser
is going to go out and they’re going to pull data from a couple different sources. One, if there are previous recent appraisal
on that property or other properties in the area, they’re going to try to get their hands
on those. Second is the information they can get probably
from the county or the city and that’s the record of deeds, what’s going on in the various
properties in and around that area, what is actually … what does this property actually
contain according to the county, what’s legal there? Because you can’t just go off of what Zillow
has, for goodness sakes, or anything that you see on the LMS. It has to be confirmed, this is what the deed
says. It says it’s this many, the location is right
here and it’s got this many acres on it, and that’s what it is. They have to confirm that and they have to
use an official record, again, not Zillow, an official record to do that. The next thing that’s going to come up is
using the county or city assessors office. Now, many assessments are done a variety of
different ways across the country, but some are very accurate. They will play a part in there depending on
how they’re calculated, and that’s really a topic for another day. That will factor in the assessed value, not
as a comparison to you as to say that well, because it’s assessed as this, we think the
price will be pretty close to that. That’s not what I’m talking about. What I am talking about is the fact they need
to pull that in and see okay, what are they counting for square footage? What’s above grade, what’s below grade? What other improvements come with the facility? What should I expect to see when I go to the
property? That’s really the main purpose behind pulling
the information from there. Then we come to the last piece and that’s
the sales in the area, actual sales. Now, normally they pull this from a source
like the LMS if they had access to that, or again, they’re going back to the county to
pull recent sales in that area. Not Zillow, they’re not looking there. I’ve seen people say to others, I’ve seen
agents tell other people to go to Zillow and make sure that you claim your home, and then
make that you put pictures in there, and make sure that you have the square footage correct
on Zillow so that when the appraiser looks at Zillow, they’ll get the numbers right. That’s just not how it happens. Okay, let me back up a second. If your appraiser is using Zillow and quotes
Zillow, fire them. Fire them on the spot. If your lender is demanding that they use
an appraiser that uses Zillow, fire the whole lot. Go someplace else because that is moronic,
idiotic, and quite frankly, wrong. They could probably have their license taken
away for such silliness. But, let’s get back to the main point. They pull all these points of data, and this
is what they’re going to gather together. This is before you actually go out and do
anything. You have to confirm exactly the property that
you’re talking about. Then you go to what is called the sales comparison
or market data approach. This is the method that is used by most appraisers
in valuing real estate today. There’s a cost evaluation that is done for
insurance purposes. That’s how much of a replacement value of
certain items. That’s a much harder thing to do and that’s
usually not what is done for real estate appraisals. They use the sales comparison or market data
approach. This is comprised of mainly three different
things. You have the recent sales, that’s number on. Then the next thing is similar features, and
then it’s the quality of the build and the materials. Now, these are judgment calls because the
recent sales are what they are, and if you don’t have recent sales in the area that are
recent enough and similar enough that one and two factor, then you really have to expand
that scope out. This is where you get into trouble in a lot
of places that don’t have the numbers to go with it is you have to expand the geographic
footprint of where you’re looking for comparables and you also have to go back in time for further. Ideally, you have things within 30 days that
are very similar in your neighborhood. That’s the great news. Then it kind of bumps out to about 90 days,
you’re still okay. Now, if you got to go out to six months and
beyond, well, now you’re talking more of a longer term economic cycle and different things
can happen and it can really skew the numbers and that’s not really where you want to be. The more you have, the better off you are. It does change over time, because it’s most
important to get the similar house, even if it is across town is the similar house. That’s a tough, tough, tough call to make
and this is where that AMC that we talked about earlier, that’s where that comes in. It really can bite you if the person who is
really looking for that similar home goes across town and it just doesn’t work because
the pricing features, the schools, whatever, is just very different, or it does. You got to have somebody that knows, and that
AMC person may not know that, and that local appraiser that you deal with may. Maybe that big company, maybe that lender
is using the AMC and the local appraiser is using that. That’s great, but just to know that you have
some of these roadblocks that could potentially screw you up in there. The next point I want to talk about is square
footage. A lot of people like to talk about square
footage going, “Hey, I’ve got a finished basement so my house is now 5,000 square feet because
it’s a 1,000 square foot basement. We’re going to count that, right? Well, yes and no. Yes, it’s counted as square footage, but appraisals
have weighted values that are given for above grade, below grade, and then basement type
areas. In other words, you have an above grade. That’s everything that’s completely above
grade and that’s measured a little bit differently from like a walkout basement or if it’s kind
of on a side of a hill. It’s not really a basement but it’s kind of
partially covered on one side, or a completely in the ground contained, you have to walk
out and up basement. Each of these holds a different value for
a variety of reasons. Again, there’s more reasons than I can share
with you right now, but know that the square footage and the value per square foot is calculated
differently for each. So, what do you do about this? How can you go about it? Make sure that you are getting the best appraisal,
getting the best appraisal for your house. How can you go about finding who your appraiser
is? Well, one, ask. Ask who they are using and where they’re coming
from. You are well within your right to do that. Just say, “Hey, who are you using?” “Oh, a guy from …” I’m up here in Loudoun
County in Northern Virginia and somebody says, “Oh, we’re bringing in a guy from Fredericksburg. Uh, that’s a long ways away. It’s technically by some people’s standards
Northern Virginia but that’s a long, long ways away. That’s an hour and a half south of here through
a variety of different markets. That’s not going to be a good thing. I’d rather have somebody come from Maryland,
which is closer towards that way than coming from Fredericksburg. You can ask that question. The second thing you want to find out is is
your information that is in your county, is it correct, is it up to date? Did you build on? Did you do an addition and didn’t get a permit
though the county? That’s bad juju right there, set you up for
a lot of other things other than appraisals. But, is everything accurate and up to date? Are all the facilities, all the features,
all the the things in your house, all those categories filled out in the county tax assessment
office? Are they accurate? If they’re not, give them a call and say,
“Hey, I don’t think this is accurate.” Then you can adjust that. That could mean that you raise the livable
square footage in your home, thereby increasing your real estate taxes, but would you rather
pay a little bit more in taxes and be doing the right thing and then get your appraisal
done properly, or do you want to just kind of ignore whatever is on the county assessors
side and then hope that the appraisal comes in and you can sell your house for what you
think it’s worth. I don’t know, up to you. It’s not my call to make. That’s yours, but I know where I stand. I’d correct the information and make sure
that you can argue on the basis of fact and not what you hope and what you think you got. Let’s move into that. What are some things that you can do, what
are some things about your house that do not factor into the appraisal value at all, or
market value via your real estate agent when they do their CMA? First thing, it doesn’t matter how much you
paid for the house. Yeah, you look at it, but it doesn’t matter. I don’t care if it was last year, two years
ago, eight months ago, or 18 years ago, how much you paid for the house just does not
factor into the value. It’s not relevant there. Also, how much you paid for improvements in
your house doesn’t matter. I’m sorry, it just doesn’t. It’s really nice. That is a really nice patio and it’s really
neat that you got this Brazilian stone that’s only available in three places on the planet
and you got it put out there, then laid by Tibetan monks. That’s all wonderful, I’m glad you paid for
that. That’s really a cool story, but it’s not going
to add that much value to the real estate. It’s just not. The fact that you used higher end materials,
if most of the homes in your neighborhood do not use higher end materials, it’s going
to make you stand out in a way that’s negative because now you will have outlaid more money
than your neighborhood can hold. This goes back to that don’t improve yourself
out of your own neighborhood. If you’ve done that, and you put some good
money down into your own house for your own enjoyment, that’s kind of where the value
stops, for your own enjoyment, it doesn’t get calculated into how much your house is
worth in an appraisal or in market value. Now, someone else, a buyer could come in and
go, “I love that Brazilian … That’s the greatest thing I’ve ever seen. I’ll give you more money for that.” Well, good, then the market works. That’s wonderful. That’s a perfect scenario. For most people, they’re going to look at
that and go, “Well, I don’t know. I could get the one down the street, all the
same house but it doesn’t have that thing, and it’s $20,000 less on the sales price.” Then they might go with that one because they
just don’t care that much about that. This is really how that comes down. This is why the comparables that you use and
how similar they are makes a difference. What happens is when you get that similar
house, house A has these features, house B has well, those features. Now you look at the various prices that they
had. There was a price, the both sold within the
rough … the same timeframe and this had five features and this had four features. Now you figure out the difference and you
go, well, that was the difference in the value of that one extra feature that this place
didn’t have. That’s how it comes down to it. It doesn’t matter how much you paid for those
improvements. It doesn’t matter how much you paid for the
house and last up, it doesn’t matter how much you owe on the mortgage either. These are very important consideration to
talk to your real estate agent about because coming in with a net gain on the sale of your
house is very, very important. Not sales price, but net gain because you
need to be able to pay off that old mortgage. You need to be able to recoup a down payment,
pay your taxes, pay your closing fees, all of those types of things. You need to be able to do those and that’s
part of your real estate agents job is to work toward your net. When it comes to the appraisal, how much you
paid for the house, how much you paid for the improvements, and how much you owe on
the mortgage just doesn’t factor in. I’m going to leave it there for right now. If you have any questions about this and you
wanted me to dig deeper into some of those areas that I kind of left alone, because you
can very easily go down Alice’s rabbit hole for that one, if you have any of those questions,
pop me in the comments down below and be sure to like and please share this video, share
this video. It means so much to me when you do that. Thank you all for watching, and we will see
you next time.

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