9 Things You’ll Learn From Your Home’s Appraisal

There are few steps in the real estate process that both Buyers and Sellers dread so equally as the appraisal. Not only does it represent the next to last step (and thus, an urgency is added to packing and making repairs), but it can literally make or break a deal that both parties have already found agreeable. An appraisal is more than a tipping point — it tells everybody, in no uncertain terms, just how close your best guess to the value of your home has actually come.

For those of you who have yet to buy your first home, it might seem insignificant to find out that your home isn’t worth what you thought. But homeownership is one of those things that creates an emotional bond and when you’re bound to a piece of land and a stack of wood, it can really damage your ego to discover that it’s not all you thought it was. It’s like finding out that everybody thinks your kids aren’t all that smart or your dog is ugly and has bad manners.

So, for home sellers, appraisal time means holding your breath and hoping all the lies you’ve told yourself about what a great house you own are really true. For home buyers, it’s more about the nagging fear that you’ve overpaid for your future home or that your bank simply won’t lend you the money because they’re not finding the value you see. By now, though, both parties are irrational, exhausted, emotionally charged and ready to be done.

Waiting for one more thing (the appraisal) can seem like more than either party can bear in even the easiest of transactions. But it’s necessary — boy is it — and that’s why I put this piece together. I want you to know what you’re getting with your appraisal, plus all those neat things it can tell you about your new home. There really is a silver lining to this thing if you’ll just squint your eyes and look really hard.

Think of an Appraisal as an Opportunity

If you’ve reached the appraisal stage as a Buyer, you’re probably wondering what’s in it for you. After all, you know what kind of problems your house has and may have in the near future from your home inspection — shouldn’t your willingness to accept those issues mean that the transaction can move ahead to closing?

Not so fast, Buckaroo. It’s important to know that what you’re paying for your new home is what it’s actually worth. Although an appraisal is typically performed for the bank’s benefit, it’s done with your best interest in mind, too. After all, if your bank just let you buy whatever for any price and you needed to sell or refinance later, you might be in big trouble if you spent too much. In the same vein, if there’s a lot of extra equity in the home that no one knows about, you may be spending way too much on mortgage insurance or interest without an expert value opinion.

This is why an appraisal is in order. It protects everybody, from you and the seller to the bank, your insurance company, your title company and even your Realtor. It protects your future, it justifies the work of the Seller’s past and in the end, is the most unbiased way to determine the true value of any piece of real estate you might care to purchase.

You’re Going to Learn a Lot From Your Appraisal

Even if you’re not into self-preservation in your now addled and frustrated state of mind, you’re going to be glad you had an appraisal once you’ve finished unpacking and are starting to wonder what happened during that flurry of activity that was your real estate transaction. There’s a lot you can learn from a home appraisal about your home, your neighborhood and the property your house sits on.

You might not be ready to see it right now, but you’ll want it soon, so sit your appraisal report aside in a place where you can find it easily later. Here are some of the better bits of information you can cherry pick off the report:

Specific Descriptions of Your Property. The very first section of the Uniform Residential Appraisal Report used by almost everybody in the US is called “Subject.” The subject, of course, is your property and in this section it’s described in a way that no one could mix it up with any other property. That’s lucky for you, since some of this info is actually useful for other stuff, like doing historical property research on an older home. This is where you’ll find your parcel number, full legal description, Census tract information and most recent tax assessment.

Characteristics of the Site. The fourth section is called “Site” and contains information about the property itself. There’s a lot of good stuff here, actually. The dimensions of your lot and zoning information, including current zoning compliance information, are contained here. That might not help you a ton, but the utility and street improvement information may.

For each site, the appraiser has to discover the types of public utilities that run to it — so if you’ve got a big dream of adding a gas stove to your new kitchen, for example, you’ll know how difficult that goal will be to achieve because your appraiser went to the trouble to get the utility information straight from the utility company. In addition, you’ll learn who is in charge of maintaining the street and alley, as well as any easements, which can be useful pieces of information in older or rural areas where these things aren’t always clear.

Lastly, the “Site” section contains information on your property’s FEMA flood zone status. Not only will it tell you if you’re in a FEMA flood zone, it’ll let you know what type of flood zone, the map number where that information was found and its date. This information can be useful if you have to buy flood insurance or are simply worried your future deck might get washed away. You’ll know right where to look for the information on what parts of your property are contained inside the flood zone.

Neighborhood Information. You may have already gone out and met the neighbors, but the information contained in the second section of your home appraisal is probably going to be news to you. Although it won’t contain information disallowed by Federal Fair Housing, such as the ethnic or racial makeup of the area, it’ll tell you plenty about the property surrounding yours. For example, the growth rate, marketing time, property demand/supply and property values sections will let you know what to expect in the future from your home’s value. If the area’s growing, the property demand/supply is in a shortage status and marketing time is short, your home’s value is likely to grow faster than that of an area in less demand, with more supply and longer marketing times.

This section also gives the neighborhood boundaries, which doesn’t always seem immediately useful. However, if you belong to a neighborhood association or hope to start one, this information tells you just who to expect to attend the association potlucks. Some neighborhoods may straddle trouble areas, others may be all roses. This can make a difference to certain professionals, including police who are given incentive pay to live in or near certain neighborhoods.

Your Home’s Actual Size. There’s a lot of information in the “Improvements” section, so I’m going to break it down into the most useful bits for easier digestion. Your home’s actual size is found in this section — it might seem like a weird thing for me to break out, but stick with me. A lot of people buy a home believing that their future home is so many square feet, per the listing they saw online. Their inspector probably didn’t bother to measure the house, so they also assumed the same information from that same listing. The problem is that the number that a Seller provides isn’t always accurate.

This is a problem and it isn’t. I’ll never forget how livid my father was when he got his appraisal back on a home where I represented him as his Buyer’s Agent well over a decade ago. The appraisal said the home was several hundred square feet smaller than the homeowner had listed on the contract and he believed he was being ripped off. He’s one of those guys that always wants to get a deal, so I could sort of sympathize, but he had toured the house repeatedly and it was fully furnished all that time — he knew about how much it would hold in furniture.

If you’re that kind of buyer, don’t even look at the square footage on the appraisal until you go to put your home on the market years later. The square footage is important to know so that you can prepare yourself for getting a building permit from your municipality, but otherwise it’s just a number. If you’re not adding on or building a garage, save this information for the day you to go sell your property so that future buyers won’t have that same knee jerk reaction.

However, if you can handle the fact that your home may be a lot smaller than you thought, look at this section and look at it hard. If it’s much smaller than you thought, take it to your homeowner’s insurance company and you may find a rate reduction is in order. The little drawing that appraisers include can also help you plan gardens, decks and other small additions and will save you time and energy trying to remeasure your home.

What Your Home’s Made Of. Although your home inspector should have given your home a long, hard look, the “Improvements” section acts as another set of eyes on your property. The appraiser will check your home out, top to bottom, though not as thoroughly as a home inspector. This information is used further along in the report to determine value, so always make sure that it matches what’s on your inspection report before accepting the report.

Value of Specific Features. This is where the appraisal report gets interesting. In the section labeled “Sales Comparison Approach,” your appraiser will determine the value of your home by comparing it to other homes like yours that have sold recently. To do this, they add and subtract value for features of your home when compared to the others being used to determine the end value.

For example, if your home has a big deck and the homes your appraiser is using for comparison don’t, that adds some value to the equation — usually. This will be shown as an addition or subtraction on the line labeled “Porch/Patio/Deck.” The appraiser will do this with each feature of your home, from the number of bedrooms to your home’s age and condition. Any other items that affect the value, like hardwood floors, are written in on the blank lines.

This section is cool because you can take this information to help you guess what sort of value certain improvements may have when you go to sell. Although the actual numbers will always be a bit fluid due to the nature of the real estate market, you can easily see how an updated bathroom compared value-wise to a new garage at the time of your purchase. If your remodeling budget is limited, consider the information from your appraisal in your research before deciding which areas to upgrade.

Similar Homes in the Area. Even in a neighborhood that wasn’t built all at once or doesn’t have the same kind of homes stacked one atop the next, the homes that are like yours can make a big difference to your property’s value. In the “Sales Comparison Approach” section, your appraiser pulled homes out of recent sales data and compared them to yours to figure out how much yours is worth.

These similar homes don’t just affect your purchase here and now, they’ll likely affect your home’s value for as long as they’re standing. Although I’d never advocate for keeping up with the Jones’s, it is important to keep an eye to how these homes fare as long as you own your own property. If these homeowners all go in and upgrade their siding and add new high-tech roofs, you need to consider doing the same, for example. Otherwise when the time comes to sell, you’ll be lumped in with a much lower class of homes than the one you bought into.

Your Home’s Overall Value. Using the “Sales Comparison Approach” section, your appraiser will have determined the exact value of your home in the current market. Although that doesn’t seem like much, it’s the best they can do without the ability to see the future. Obviously, this is what an appraisal is for, but rather than just provide you with a single number or a range of numbers, your whole home’s appraisal is about building the case for why your home is valued the way it is.

There are some factors you can influence, like square footage and number of bedrooms, and some factors you can’t, like neighborhood. If you’re looking to maximize your value, you’ll do yourself a huge favor to treat your appraisal like a tool and upgrade items that have negatively affected your home’s value.

Your Home’s Replacement Cost. About halfway down page three is a section called “Cost Approach.” Although it’s optional for most residential loans, it’s used by many appraisers, which can be good news for you, especially when it comes to saving money on insurance. Your insurance company does their own cost replacement calculation, but some companies tend to be overly dramatic about this figure, which ends up costing you plenty over time.

Many insurance agents will accept a copy of the appraisal that shows a home’s replacement cost when they’re determining the cost replacement value of your home. So, for example, if your home’s replacement cost is $190,000 on your appraisal, but your insurance company has it calculated at $250,000, you might be able to realize $60,000 worth of insurance savings. It’s a little section that can mean big money in the right situation.

The Bottom Line: An Appraisal is More Than Just a Number For Your Bank

Having an appraisal isn’t an optional service for most buyers, but it’s good to know that you’re not just paying for another thing to make your bank happy. Although buying a home is an expensive and time-consuming process, there’s a lot of information you can glean from the various reports and materials that are being prepared for you right now.

From detailed information about your property and neighborhood to hints at ways to improve your house’s value, your appraisal is a lot more than a report that just produces a single number to determine your loan to value ratio. One day you’ll look back on your appraisal and find gems of wisdom in it — even if you’re not ready to do that today.

After all the stress of buying melts away, you’ll want to get started on making your house your own. This handy document can help guide your spending long after closing and help you preserve your home’s value for decades to come.

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