Originally posted at DWSlaterCo Blog on November 21, 2014
You just had your home appraised and find out that the swimming pool that you just put in last year is valued half of what you paid for it. Why is that? Well appraised market value is not the same a cost. You have to understand what an appraisal is and how the value is derived.
When a real estate appraisal is performed on your property it is a value opinion of the property at a specific time most often the date of inspection. Most real estate appraisals are for a financial lending institution. If a mortgage is to made on a property then most often an appraisal of the market value is required.
The definition of value as defined by Fannie Mae is: Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
- buyer and seller are typically motivated;
- both parties are well informed or well advised, and each acting in what he or she considers his/her own best interest;
- a reasonable time is allowed for exposure in the open market;
- payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto; and
- the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
In order to determine the market value an appraiser finds the most similar sales available that recently sold. The most suitable sales are within 90 days, in the subject’s immediate neighborhood and are the same size, age, design as the property being appraised (referred to as the subject) and with the same amenities. The appraiser then looks at the price these comparables sold in order to determine the market value of the subject. Sometimes there are not sales that fit all of these criteria so the appraiser finds the sales that are the most similar and then makes adjustments for differences. The adjustments are based on how the market reacts to those differences and appraisers have ways of calculating and determining those adjustments. We will show you a simple example of one way adjustments are determined.
Example: Your home is a 3,000 sq ft home Ranch style home built in 1980 with a pool located in Cool Creek subdivision. There are four sales that sold within the past 90 days in Cool Creek subdivision. All four sales are around 3,000 sq ft Ranch style homes built in 1980. Two of the sales have swimming pools and two do not. The two sales with a pool sold for $15,000 more than the two sales that did not have pools. Based on this data an appraiser can make an adjustment for pools of $15,000 as the market reaction to pools was $15,000 more than homes without pools. The pools may have cost $30,000 to put in but the market response to a home with pool is $15,000. Buyers are willing to pay $15,000 more for a home with a pool compared to a similar home without a pool.
We hope this helps you in understanding why the appraised value is not the same as cost value.
Disclaimer: All information deemed reliable but not guaranteed. The information is meant entirely for educational purposes and casual reading only and is NOT intended for any other use. This information is NOT intended to support an opinion of value for your appraisal needs or any sort of value conclusion for a loan, litigation, tax appeal or other potential real estate or non real estate purpose. If you’d like to obtain additional information or order an appraisal for your specific needs, please contact us at www.dwslaterco.com.