How appraisers look at the components of a property, Part 1
If you’ve recently bought or sold a home that involved a mortgage or loan, chances are an appraiser has been involved at some point to confirm the property’s value. And if you asked your agent or mortgage broker what an appraiser looks at, they probably gave you a list of factors: Location, size, condition, comparable sales, etc.
That’s correct, as far as it goes. But a list like that really isn’t sufficient, especially if you haven’t been through the appraisal process before. Here, we give you a little more insight into what an appraiser is looking at when they are evaluating (and valuing) your property.
For most residential properties, ‘location’ isn’t as simple as a city or street. It’s most helpful to think of the location as being the streets or blocks nearby which have features and benefits that are similar to the one being appraised.
A given location may have more in common with a neighbourhood 10 blocks away but which feeds into the same schools and has the same zoning than a property 1 block way that’s zoned commercial and has low-rise businesses.
Appraisers are looking for properties which are as similar as possible to the one they’re appraising. It’s helpful to think of comparable sales as “Properties that would have been in the same basket of options as the one being appraised, for the average buyer”.
In other words, if the house next door sold a month ago, but it was a century home with 6 bedrooms, a detached garage apartment and double the yard size, it’s not a great comparable sale if the house being appraised is a 3-bedroom new build on a standard-sized lot. A property 3 blocks away with the same home layout and a similarly-sized lot would be a good comp, because the ‘average’ buyer would likely have considered it as an option when they were choosing what to purchase.
(This doesn’t mean, by the way, that your appraiser won’t take a look at the sale of that 6-bedroom place, just for background research. Good appraisers do their homework.)
When it comes to residential properties, lot size is pretty straightforward: If most of properties in the neighbourhood have similar-sized lots, then the appraiser isn’t going to make much in the way of adjustments for lot size: It really doesn’t matter if one property has 52-foot frontage and another has 49-foot frontage – the difference isn’t enough to put a value on.
However, lot size takes on more relevance if the property in question has a much larger or much smaller lot than the rest of the neighbourhood.
Then the question is about utility and the average buyer: Is the lot so much bigger than those of its neighbours that purchasers would be prepared to pay a premium compared to the house down the street? Is the lot so much smaller than those of its neighbours that the average buyer would pay less for this one?
It’s important to remember that the ‘average buyer’ in these scenarios aren’t determining their willingness to pay a premium or a discounted price based on a formal calculation. Their thinking is more like “Oh, this place also has a biggish backyard – that’ll be great for the kids!”. We know that reaction results in them being willing to pay a slightly higher price for that property, but it’s tough to quantify – which is where comparable sales come in.
(Please note: Lot size is of course far more important and far more scientifically calculated when we’re talking about commercial, industrial and agricultural properties. But today we’re addressing residential appraisals specifically.)
Yes, square footage is important and definitely the right place to start when thinking about house size and its effect on value.
However, utility is also key: Two houses can have the exact same square footage but have completely different values based on how that space is used.
For example, I once appraised a property where the above-ground area was about 2500 square feet. However, the owners had decided to use 1200 square feet (almost half the house) as their bedroom. The rest of the house had just 2 small bedrooms, 1 small bathroom, and a normal-sized kitchen/living/dining combination room. The other homes in the area were smaller (2000 square feet) but ultimately sold for more money because buyers in that area wanted larger bedrooms for their kids, larger main living spaces, and family rooms – the 1200 square foot master suite was a bit of a white elephant.
It’s really all about the ‘average buyer’
Appraisers’ first consideration when determining value starts with thinking about the ‘average buyer’, what they want out of a property, what they’re willing and able to pay for that property, and what tradeoffs they’re willing to make (“Well, this bathroom is a bit small but the living room has a great view…”). Yes, there may be unique buyers who only want to be on one particular street, or who want a specific lot size, or who had their heart set on a 1200-square-foot bedroom. But appraisers determine value based on the behaviour of ‘average’ buyers.
PART 2: Rooms, condition and function.