A home is often one of the biggest purchases and largest assets a person will obtain in their lifetime. But when it's time to sell or refinance, how do realtors and appraisers determine its worth?
Both realtors and appraisers have a say in a home's value.
"The appraisal is designed to protect the bank so the bank doesn't loan too much money for a property. When the appraiser visits the home, they're comparing it to other similar homes using square-footage, finishes, the age of the home, the condition, the location, etc.," says Jodi Tollefson, president of Fargo-Moorhead Area Association of Realtors.
On the contrary, the realtor is an advocate.
"They're working for the client to get the highest price for the seller or, if they're representing the buyer, the best opportunity for that buyer, while appraisers are the neutral party to the transaction."
According to Eric Grande, owner of Northpointe Appraisals, an appraisal typically takes up to 45 minutes — 30 minutes inside, 15 to 20 outside — depending on the size of the house.
"We are the eyes of the bank. They want to make sure if they get this (house) back they can at least recoup their money," he says.
In addition to the home inspection, an appraiser looks at comparable homes.
"You want to get a superior house, an inferior house and a house that's as similar as you can," Grande says. "When you're in the city, you try to do it within a mile but you want to get it in a similar neighborhood with the most similar property."
Realtors, on the other hand, have their own process called a comparative market analysis (CMA) with the same goal in mind.
"Ours is more of an opinion as far as what the market value of a home is," says Ericka Schott, realtor and team leader of the Ericka Schott Team at Berkshire Hathaway HomeServices Premier Properties. "A good market evaluation takes about two or three hours."
Like appraisers, realtors analyze amenities and condition of the home.
"If your carpet is really worn, hardwood floors are really scratched up or if you have dings in the wall, I'd definitely have those things either replaced or fixed," she says.
Determining home value is no easy task.
"No one has a crystal ball in this industry but we sure do have some great data that we can use off of our multiple listing service stats," Tollefson says. "We team up with appraisers to educate ourselves on what we should adjust for and how we can communicate that back to our clients so there aren't surprises."
So be smart about your home's value and don't buy into the many myths perpetuated by frantic sellers and buyers. Here, we debunk six long-standing myths.
Myth #1: Online values, city assessments are accurate
Some turn to the internet for a home estimate, but Schott cautions against it.
"When they go online and get those different estimates, that's not going to be true market value for our area because it's taking on a wider scope instead of figuring out exactly what the floor plan is, exactly what somebody's square footage is," she says.
Schott says sites like Zillow.com don't take into consideration what part of town the home is in, proximity to schools, outside amenities like a patio, deck or fenced-in yard and many other factors. They also don't have the live data real estate agents do when the home closes.
Clients will find that "a lot of homes have sold six months ago," Tollefson says.
Homeowners can't always go by city assessments either.
"City assessors are doing it for tax purposes — they're not doing so you know what your home value is actually worth," Schott says.
When conducting an appraisal, Grande says he looks at the city assessments but doesn't put much weight on the numbers because the market can fluctuate.
Myth #2: All additions are good additions
"A lot of people think that bedrooms are a key component in increased value, which is not accurate at all," Grande says. "You can't just keep adding bedrooms. Your bedrooms just get smaller and your bathroom-to-bedroom ratio may be off. You can't have seven bedrooms and just one bathroom — there's a functional issue there."
In valuation, conformity and consistency are key, Grande says. For example, in a $200,000 home, a $10,000 fireplaces isn't realistic. On the flip side, a $2,000 fireplace isn't consistent for a $1 million home.
"You need to build to your categorization of your house — to your value point," he says. "You don't put a $50,000 custom kitchen into a $150,000 house. You're over-improving."
Homeowners must be cautious of the extent of improvements so as not to over-improve. "Or just understand that improvements you're making is for you to enjoy and doesn't necessarily mean you'll get dollar-for-dollar value back (when you sell)," Tollefson says.
Myth #3: Homes sell above value
Tollefson says the real estate market has been robust the past four years, but has recently evened out.
"Our market has kind of self-corrected and is back to normalcy," she says. "We feel like it's kind of an equal buyer versus seller's market."
Gone are the days where sellers can list their homes for more than they're worth.
"You hear the market is strong so everybody wants to get their house on the market and list it for $10,000 more that what they should, but that's not going to set them up for a successful closing," Tollefson says. "They have to be aware that an appraisal is going to be done."
We still have to do the evaluation and if the square footage and the amenities doesn't warrant that price, it's hard for a realtor to list at that."
If a home is listed overprice, the home may sit longer on the market and run into appraisal problems when closing, Tollefson says.
Myth #4: Sheds count toward home value
When appraising a home, Grande assesses outdoor amenities, including decks, fences, sheds, garages, yards and more. But, contrary to common beliefs, not all sheds count toward home value.
"Sometimes you have a shed with a concrete floor and that's part of the real estate because that's part of the property," he says. "But then you have a shed with a wood base and that's not (part of the property) because it doesn't have footing. It's not part of the real estate — it's personal property, it just sits on the ground."
In order to count as real estate, sheds need to be bound to the land in some way.
Myth #5: Every remodeling dollar is gained back
Some homeowners hope to increase value through remodeling. But Grande explains that some homeowners assume that with a $50,000 kitchen remodel their home will increase in value by that amount.
"The problem is once you take out all the cabinets, the countertops, all the flooring and lights that were in there — all that had value at one point, and it still did," Grande says. "What you really have to do is subtract the value that was given to that, then add yours. Unless it's at the end of its useful life, like shingles, there's value to every component of the house," he says.
Myth #6: Landscaping doesn't add value
Some say dumping thousands of dollars into landscaping is a waste of cash, but Grande says that isn't true.
"When a buyer walks into a house, they know within the first 30 seconds of seeing the home whether they're even interested in buying it or not," Schott says. "Curb appeal is huge."
Homeowners consider size and value of the home when determining how much to invest in landscaping.
"If you have a $1 million house you're probably going to put (up to) $50,000 in landscaping — sprinkler systems, rocks, shrubs, water fountains, basketball courts, indoor/outdoor pools," he says. "It has to be attached to the real estate for it to be considered."
Updates that pay
Determining home value can be a vague process, but here are some improvements to consider:
• Increase square footage. "Anything that adds square-footage will automatically add value," Tollefson says.
• Remodel with quality in mind. While Tollefson says cosmetic elements are hit or miss, quality renovations in kitchens and bathrooms should add value.
• Consider updates for the buyer's value. Grande says homeowners must consider, if two identical houses sat next to each other, how much extra would a buyer pay for a fireplace, maintenance-free decking, an extra bathroom or other amenities? "If people are willing to pay more for something, it will be worth more than it's counterpart," he says.
• Replace outdated components. Schott says homes built before the '80s should swap out fuse boxes for an electrical breaker panel, which can affect an appraisal. Check wear and tear on flooring; if it needs to be replaced, visit the clearance section or watch for sales during holidays. "Same thing with appliances — around holidays you can get really good deals," she says.
• Take care of the outside. Although not always a fun purchase, windows, siding and shingles should be considered. "If you can take care of the outside of your house, then there's nothing that can get in to ruin it," Grande says.