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Secrets of a Real Estate Appraisal - Firehill University - YouTube
Channel: The Firehill Group: More than just real estate.
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Forest Selby: You'll be surprised how many
real estate agents don't really understand
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what an appraisal is or how it's done.
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Many think it's just like the CMA that they
come by and say, "It's just a bunch of averaging,
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right?
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Take a bunch of recent sales, you average
them, and then there's your price," or you
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do some square footage model and you go, "This
is what that sold for.
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That's how many...price per square foot it is,"
so you apply that to the new house.
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Well, that's not the case at all.
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Today I'm going to share with you a couple
inside secrets about what an appraisal actually
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is, how it's calculated, and a couple things
that you can do to make sure that your appraisal
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is done accurately.
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Lastly, a couple little things that most people
think that factor into an appraisal or factor
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into how much their home is worth, but it
really doesn't.
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Okay, appraisal.
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What is an appraisal?
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An appraisal is literally an opinion of value
during a specific time.
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That's really the definition of it.
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That's the book definition, that's actually
what it is.
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It's someone that is doing the appraisal that
is going to give you an opinion of value based
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based on a number of parameters.
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These days, most appraisals are done through
Appraisal Management Companies or AMCs, so
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it's not usually that local guy that you see
sometimes.
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Often, it's some appraiser that the mortgage
company has picked out that is a long way away.
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They could be driving an hour or two or three
away and coming in to do your appraisal.
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That presents a couple of challenges.
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They may not know the area.
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They may not understand that just because
their square footage and a certain price of
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a house on this side of the street, that that
same square footage and that same size house
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equals on the other side of the street or
across town, because we all know that real
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estate can be micro local meaning that just
on the same side of the street, different
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address, different zip code, can mean a world
of difference when it comes to value in the
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marketplace.
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That's one of the disadvantages of AMCs.
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When you understand that, then you see something
that just comes back and the comps don't look
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quite right, those are the comparable sales
that they're using in their inspection report
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or appraisal report.
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Once you see those and they don't match up,
then you can go, "Hey, these don't match,"
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and you can go back to your lender and say,
"I don't think these comps are very valid,"
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and then you may have a case and they may
issue another appraisal.
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But, let's get down to what an appraisal is
and how it is factored.
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Well, first of all, you have the appraiser
is going to go out and they're going to pull
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data from a couple different sources.
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One, if there are previous recent appraisal
on that property or other properties in the
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area, they're going to try to get their hands
on those.
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Second is the information they can get probably
from the county or the city and that's the
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record of deeds, what's going on in the various
properties in and around that area, what is
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actually ... what does this property actually
contain according to the county, what's legal
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there?
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Because you can't just go off of what Zillow
has, for goodness sakes, or anything that
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you see on the LMS.
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It has to be confirmed, this is what the deed
says.
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It says it's this many, the location is right
here and it's got this many acres on it, and
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that's what it is.
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They have to confirm that and they have to
use an official record, again, not Zillow,
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an official record to do that.
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The next thing that's going to come up is
using the county or city assessors office.
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Now, many assessments are done a variety of
different ways across the country, but some
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are very accurate.
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They will play a part in there depending on
how they're calculated, and that's really
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a topic for another day.
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That will factor in the assessed value, not
as a comparison to you as to say that well,
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because it's assessed as this, we think the
price will be pretty close to that.
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That's not what I'm talking about.
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What I am talking about is the fact they need
to pull that in and see okay, what are they
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counting for square footage?
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What's above grade, what's below grade?
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What other improvements come with the facility?
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What should I expect to see when I go to the
property?
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That's really the main purpose behind pulling
the information from there.
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Then we come to the last piece and that's
the sales in the area, actual sales.
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Now, normally they pull this from a source
like the LMS if they had access to that, or
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again, they're going back to the county to
pull recent sales in that area.
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Not Zillow, they're not looking there.
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I've seen people say to others, I've seen
agents tell other people to go to Zillow and
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make sure that you claim your home, and then
make that you put pictures in there, and make
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sure that you have the square footage correct
on Zillow so that when the appraiser looks
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at Zillow, they'll get the numbers right.
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That's just not how it happens.
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Okay, let me back up a second.
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If your appraiser is using Zillow and quotes
Zillow, fire them.
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Fire them on the spot.
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If your lender is demanding that they use
an appraiser that uses Zillow, fire the whole
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lot.
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Go someplace else because that is moronic,
idiotic, and quite frankly, wrong.
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They could probably have their license taken
away for such silliness.
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But, let's get back to the main point.
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They pull all these points of data, and this
is what they're going to gather together.
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This is before you actually go out and do
anything.
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You have to confirm exactly the property that
you're talking about.
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Then you go to what is called the sales comparison
or market data approach.
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This is the method that is used by most appraisers
in valuing real estate today.
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There's a cost evaluation that is done for
insurance purposes.
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That's how much of a replacement value of
certain items.
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That's a much harder thing to do and that's
usually not what is done for real estate appraisals.
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They use the sales comparison or market data
approach.
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This is comprised of mainly three different
things.
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You have the recent sales, that's number on.
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Then the next thing is similar features, and
then it's the quality of the build and the
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materials.
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Now, these are judgment calls because the
recent sales are what they are, and if you
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don't have recent sales in the area that are
recent enough and similar enough that one
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and two factor, then you really have to expand
that scope out.
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This is where you get into trouble in a lot
of places that don't have the numbers to go
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with it is you have to expand the geographic
footprint of where you're looking for comparables
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and you also have to go back in time for further.
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Ideally, you have things within 30 days that
are very similar in your neighborhood.
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That's the great news.
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Then it kind of bumps out to about 90 days,
you're still okay.
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Now, if you got to go out to six months and
beyond, well, now you're talking more of a
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longer term economic cycle and different things
can happen and it can really skew the numbers
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and that's not really where you want to be.
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The more you have, the better off you are.
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It does change over time, because it's most
important to get the similar house, even if
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it is across town is the similar house.
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That's a tough, tough, tough call to make
and this is where that AMC that we talked
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about earlier, that's where that comes in.
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It really can bite you if the person who is
really looking for that similar home goes
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across town and it just doesn't work because
the pricing features, the schools, whatever,
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is just very different, or it does.
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You got to have somebody that knows, and that
AMC person may not know that, and that local
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appraiser that you deal with may.
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Maybe that big company, maybe that lender
is using the AMC and the local appraiser is
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using that.
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That's great, but just to know that you have
some of these roadblocks that could potentially
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screw you up in there.
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The next point I want to talk about is square
footage.
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A lot of people like to talk about square
footage going, "Hey, I've got a finished basement
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so my house is now 5,000 square feet because
it's a 1,000 square foot basement.
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We're going to count that, right?
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Well, yes and no.
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Yes, it's counted as square footage, but appraisals
have weighted values that are given for above
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grade, below grade, and then basement type
areas.
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In other words, you have an above grade.
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That's everything that's completely above
grade and that's measured a little bit differently
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from like a walkout basement or if it's kind
of on a side of a hill.
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It's not really a basement but it's kind of
partially covered on one side, or a completely
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in the ground contained, you have to walk
out and up basement.
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Each of these holds a different value for
a variety of reasons.
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Again, there's more reasons than I can share
with you right now, but know that the square
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footage and the value per square foot is calculated
differently for each.
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So, what do you do about this?
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How can you go about it?
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Make sure that you are getting the best appraisal,
getting the best appraisal for your house.
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How can you go about finding who your appraiser
is?
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Well, one, ask.
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Ask who they are using and where they're coming
from.
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You are well within your right to do that.
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Just say, "Hey, who are you using?"
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"Oh, a guy from ..." I'm up here in Loudoun
County in Northern Virginia and somebody says,
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"Oh, we're bringing in a guy from Fredericksburg.
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Uh, that's a long ways away.
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It's technically by some people's standards
Northern Virginia but that's a long, long
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ways away.
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That's an hour and a half south of here through
a variety of different markets.
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That's not going to be a good thing.
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I'd rather have somebody come from Maryland,
which is closer towards that way than coming
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from Fredericksburg.
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You can ask that question.
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The second thing you want to find out is is
your information that is in your county, is
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it correct, is it up to date?
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Did you build on?
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Did you do an addition and didn't get a permit
though the county?
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That's bad juju right there, set you up for
a lot of other things other than appraisals.
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But, is everything accurate and up to date?
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Are all the facilities, all the features,
all the the things in your house, all those
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categories filled out in the county tax assessment
office?
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Are they accurate?
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If they're not, give them a call and say,
"Hey, I don't think this is accurate."
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Then you can adjust that.
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That could mean that you raise the livable
square footage in your home, thereby increasing
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your real estate taxes, but would you rather
pay a little bit more in taxes and be doing
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the right thing and then get your appraisal
done properly, or do you want to just kind
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of ignore whatever is on the county assessors
side and then hope that the appraisal comes
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in and you can sell your house for what you
think it's worth.
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I don't know, up to you.
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It's not my call to make.
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That's yours, but I know where I stand.
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I'd correct the information and make sure
that you can argue on the basis of fact and
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not what you hope and what you think you got.
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Let's move into that.
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What are some things that you can do, what
are some things about your house that do not
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factor into the appraisal value at all, or
market value via your real estate agent when
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they do their CMA?
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First thing, it doesn't matter how much you
paid for the house.
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Yeah, you look at it, but it doesn't matter.
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I don't care if it was last year, two years
ago, eight months ago, or 18 years ago, how
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much you paid for the house just does not
factor into the value.
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It's not relevant there.
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Also, how much you paid for improvements in
your house doesn't matter.
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I'm sorry, it just doesn't.
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It's really nice.
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That is a really nice patio and it's really
neat that you got this Brazilian stone that's
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only available in three places on the planet
and you got it put out there, then laid by
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Tibetan monks.
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That's all wonderful, I'm glad you paid for
that.
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That's really a cool story, but it's not going
to add that much value to the real estate.
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It's just not.
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The fact that you used higher end materials,
if most of the homes in your neighborhood
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do not use higher end materials, it's going
to make you stand out in a way that's negative
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because now you will have outlaid more money
than your neighborhood can hold.
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This goes back to that don't improve yourself
out of your own neighborhood.
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If you've done that, and you put some good
money down into your own house for your own
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enjoyment, that's kind of where the value
stops, for your own enjoyment, it doesn't
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get calculated into how much your house is
worth in an appraisal or in market value.
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Now, someone else, a buyer could come in and
go, "I love that Brazilian ... That's the
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greatest thing I've ever seen.
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I'll give you more money for that."
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Well, good, then the market works.
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That's wonderful.
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That's a perfect scenario.
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For most people, they're going to look at
that and go, "Well, I don't know.
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I could get the one down the street, all the
same house but it doesn't have that thing,
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and it's $20,000 less on the sales price."
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Then they might go with that one because they
just don't care that much about that.
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This is really how that comes down.
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This is why the comparables that you use and
how similar they are makes a difference.
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What happens is when you get that similar
house, house A has these features, house B
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has well, those features.
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Now you look at the various prices that they
had.
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There was a price, the both sold within the
rough ... the same timeframe and this had
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five features and this had four features.
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Now you figure out the difference and you
go, well, that was the difference in the value
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of that one extra feature that this place
didn't have.
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That's how it comes down to it.
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It doesn't matter how much you paid for those
improvements.
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It doesn't matter how much you paid for the
house and last up, it doesn't matter how much
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you owe on the mortgage either.
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These are very important consideration to
talk to your real estate agent about because
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coming in with a net gain on the sale of your
house is very, very important.
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Not sales price, but net gain because you
need to be able to pay off that old mortgage.
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You need to be able to recoup a down payment,
pay your taxes, pay your closing fees, all
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of those types of things.
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You need to be able to do those and that's
part of your real estate agents job is to
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work toward your net.
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When it comes to the appraisal, how much you
paid for the house, how much you paid for
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the improvements, and how much you owe on
the mortgage just doesn't factor in.
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I'm going to leave it there for right now.
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If you have any questions about this and you
wanted me to dig deeper into some of those
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areas that I kind of left alone, because you
can very easily go down Alice's rabbit hole
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for that one, if you have any of those questions,
pop me in the comments down below and be sure
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to like and please share this video, share
this video.
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It means so much to me when you do that.
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Thank you all for watching, and we will see
you next time.
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