The Truth About Appraisals

I wanted to address real estate appraisals. I know a lot of my clients were nervous, scared, confused, and down right “misinformed” about appraisals before working with me.

I think the best way to start is by explaining what a real estate appraisal is. I will give an example to help clarify–Sally and Bob are buying their first house. They buy a 4 bedroom, 2.1 bath home in St. Charles, IL for $379,000. After the price has been agreed upon and all inspections have been conducted, the buyers’ lender will order an appraisal. This is done to ensure that the buyer is not paying more than a property is worth. So, in the case of the St. Charles, IL home, that appraisal needs to come back at $379,000 or higher; if not, the seller will have to sell the home for the lower appraised value, or the buyer will have to put more money down to offset the difference, or the difference can be split, and lastly, the deal is now null and void and will be terminated. So, in theory, the lender is trying to protect their loan to value and also prevent their client from overpaying on a home in this economy. Banks will not approve financing if it leads to the borrower overextending their debt ratio on a home that is not appraising for the purchase price. Consequently, the appraisal’s main purpose is to provide everyone involved in the transaction with an objective and accurate value of the property being purchased at that “moment in time.”

So now that we understand what an appraisal is, let’s discuss what goes into a subjective appraisal. There are a few approaches I have seen appraisers use to determine a property’s value. I will just focus on the one I have seen used the most in the St. Charles, IL real estate market–that would be the comparison approach. With the comparison approach, the appraiser will simply compare the subject property with three similar properties usually in the same subdivision or area or/close proximity within 1 mile, if possible. So homes for sale in Geneva, IL rarely get compared to homes for sale in St. Charles, IL. Appraisers try to use properties that have sold in the last 3 months, but will go back 6 months to get a better picture on the subject’s value. Also, when using this approach, the appraiser will factor in the current strength of that particular real estate market, take into account the average days on the market in that area, and if the property is located on or around any negative surroundings (Example railroads, high voltage wires, and busy roads). They will also factor in material defects, structural issues to the property, and functional obsolescence (Outdated floor plan, roof with curling or missing shingles or down to the underlayment, severely cracked or leaking foundation–just to name a few issues). The only time an appraisal is not required is on a cash deal, but I would recommend that you write in the contract that the house must appraise for purchase price or higher to protect your cash buyer from overpaying on their purchase.

So, now we know the basic approach appraisers use. The big question is what features do appraisers add value to the appraisal?

There are 4 main areas that I feel appraisers give some added value:


1. Exterior: In the St. Charles area, a home with brick and cedar siding is given more value than aluminum, vinyl, or EIFS (dryvit) exteriors…Location and lot size are taken into consideration…Garages are also factored in as to what is “normal” for the subdivision or area…

2. Interior: The square footage of the home is one of the major factors in appraising. The smaller the home, the more value to square footage in comparing homes…The age and features of the home are compared–Number of bedrooms (if most in the subdivision are 4 bedrooms and you have three bedrooms, that is taken into consideration in value), baths, floor plan functionality, and general condition of home. In the kitchen–granite counters, only upgraded attached appliances like a dishwasher or oven add value. Taller cabinetry (42″ vs. 36″), pantry, breakfast bar/island. Is the basement a walk-out or English basement, is basement finished (price per square foot is determined by quality of finish and features) basement bath, deep pour vs. shorter ceiling.

3. Upgrades: The standards for value for upgrades is gotten more difficult as the economy has tightened… Things that do add value are hardwood, marble, ceramic or slate flooring, upgraded cabinetry and counters, Plantation shutters, lighting, faucets, etc. Things like paint, window treatments, washer, dryer, refrigerator, and new paint will help your home sell quicker (if priced properly), but it does not greatly impact the value of the appraisal.

4. Front and Backyards: Buyer put a lot of emphasis on location, curb appeal, and privacy in the backyard…Many people prefer golf course settings, woods, water/pond views, deep well-landscaped yards, and generally not being able to see into your neighbor’s home. Some credence is given to lot setting…Golf course, woods, and river front are taken into consideration in the appraisal. Value is taken off for a setting that is backing to, next to or fronting on a busy road, close to railroad tracks, high voltage wires, factories, shopping centers, and other undesirable locations.

Appraisals are dependent on what comparable homes the appraiser chooses and what is available at that time. You can have two different appraisers out to do a relocation appraisal and they both may be more than 5% apart. Appraisals are difficult if you have a unique house, if not many homes have closed in your area in the last 6 months, and if you get an appraiser that is not from your county and is not totally familiar with the closed inventory. In reality, your appraisal is somewhat dependent on what your neighbors’ motivation is and what their sale prices are.

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