Do appraisals matter when you are buying a condo or a home? Does it matter what the appraiser says? If not, then why do I need to have an appraisal? This blog post was inspired by a current deal I am working on in Chicago, in which an appraisal came back under value.
What is an appraisal? An appraisal is an estimated value of your home at a specific date in time.
Why do I need an appraisal? If you are getting a mortgage then a lender will require an appraisal. Since your home is the collateral for the mortgage the lender wants to make sure that your home is worth what you are paying.
How accurate are appraisals? The accuracy of an appraisal can be compared to the accuracy of a stock analyst on wall street. The value derived by the appraisal can be accurate but many times it can not be. It is important to understand how the appraisal works.
Typically when the appraiser is reviewing your property they have a copy of your purchase contract. Therefore, as they are pulling comps they KNOW BEFORE HAND what you agreed to pay. Therefore what the appraiser then does is look for comps (comparable sales) to see if your sales price is accurate. The other item to note is that the appraiser uses the MLS. The MLS is the same system I use and your Realtor uses when you sit down to decide what offer to make. This same system shows you comparable sales which you more than likely looked over when you discussed with your Realtor the maximum you were willing to pay for the property. In essence the appraiser is doing the same research your Realtor did.
What is the appraiser NOT doing? The appraiser is not doing a lot of things. First, they are not going into already sold properties. The only property they are entering is the very one which they are doing the appraisal on. Instead they are relying on information from the MLS or from other Realtor’s who they have called on the phone or e-mailed to find out details about a sold property.
The appraiser is also not taking into account details. For instance their thought process is that granite is granite. The fact that your property has $100 per square foot granite and the comparable they are using has $30 per square foot granite makes no difference to the appraiser. Many times the quality of the cabinetry, quality of the appliances and quality of the flooring is not taken into account. As long as the finishes are “updated” many appraisers consider properties equal. You might think this doesn’t matter. However, look at a kitchen outfitted with Sub Zero, Wolf and Miele and then compare it to a kitchen with Kitchen Aid and you’ll see exactly what I mean. Look at a kitchen with cabinets from Home Depot and then compare with Snaidero or custom made cabinetry and you’ll again see what I mean. You as a buyer have looked at many properties in similar price point and therefore you may notice the difference. Many appraisers on the other hand simply don’t factor these differences into their report.
Assessments: Assessments can dramatically change a properties value. If the assessment for a condo is $500/mo and the same type of condo in a different building has an assessment of $900/mo they will typically not have the same value! All things being equal the higher assessment can depress the price of that condo. MOST of the time, if not all of the time, appraisers do not take this into account. They’re taught to compare like properties which means properties with similar taxes and assessments but many times this is not the case.
Why do some people put so much weight on appraisals? Many buyers put weight on appraisals simply because they like confirmation that they are not over paying. The reality is, however, that an appraisal many times is worthless, especially in situations when you are buying a condo. The appraisers will 90% of the time appraise the property for the contract price or below.
So if you are in a situation where the appraisal has come back slightly lower than your contract price definitely consult your Realtor and scrutinize the appraisal report. Take everything the appraiser sends you with a grain of salt…and perhaps a drink as well!
Paul Blackburn is an Illinois licensed Realtor and associate Broker with @ Properties in Chicago. He can be reached via e-mail at Paul@PKBlackburn.com For more information about buying condos in Chicago visit Paul’s website at www.BuyingInChicago.com to learn more about the buying process, contract process, inspections and much more!