What is a home appraisal? Does an appraisal effect the sales price of a home?

Dawn Miller, a Washington D.C. area appraiser with 20+ years of experience, is my guest on this episode of Listen Up Home Buyers!

Here is the transcript of the podcast.

‍

This is Listen Up Home Buyers, the only podcast offering home buying advice and tips from true buyer agents. And now here's your host, Victoria Ray Henderson.

Victoria Ray Henderson:

My guest today is somebody really special. Dawn Marie Miller, a certified real estate appraiser in Maryland, Washington, DC and Virginia. She is VA approved, FHA approved and has 20 years of experience appraising real estate in the Washington area.

Dawn Marie Miller:

Thank you for having me.

Victoria Ray Henderson:

We're going to start with the basics. What is an appraisal in real estate?

Dawn Marie Miller:

Appraisal is a tool that banks hire individuals that are licensed, certified or a general appraiser to determine the value of a home in order to loan on that home. So it's really kind of like when you go to CarMax, you bring in your car, they tell you what it's worth, and then they give you exactly what they tell you it's worth

Victoria Ray Henderson:

In real estate, why does an appraisal matter?

Dawn Marie Miller:

Because a bank is only going to loan on a home for what it's worth. Even though we are determining the value for the buyer, we are not hired by the buyer, even though they pay for it. And that's something that a lot of people have a hard time understanding, because when we submit the appraisal, the buyer always calls and says, "Can I have a copy?" So they would have to call their bank and they'd have to obtain that information because the bank owns the appraisal.

Victoria Ray Henderson:

And do you always need an appraisal when you're buying a home?

Dawn Marie Miller:

No, actually you don't. It depends, and again, each lender is different. But in some cases when a borrower is putting down a large amount, it's underneath a percentage that they require, they get appraisal waivers. So what a lender will do is they have a system. It's an automated system that they can put an address in. It's kind of like a Zillow, but it's not.

And they put the address in and it tells them around what the price of the home would be, based on the comps in the area. And that doesn't necessarily mean that those comps are similar to the subject, but they can get an idea. 

And let’s say the house is being sold for 500,000 and they say that it's probably worth about 450,000. Well, if you're putting 50% down, then you are within that range and they agree to sell you the house without having an appraisal.

Victoria Ray Henderson:

You brought up the Z word, the Zestimate comes up a lot. What's your opinion of the zestimate?

Dawn Marie Miller:

That it's not accurate. In some cases, what Zillow does is they include the basement in your overall square footage, and then you've got an over-evaluated appraised value. And I had that with a split foyer where it was 900 square feet above grade and 900 below grade, and they compared it to a home that was 1,800 square feet. Five bedrooms as opposed to three bedrooms because they included all that square footage and the bedroom count and bath count into that. So in some cases it can be within a particular range, but I do not recommend people use that site to determine what their house is valued for.

So April 1st, 2023, all appraisers had to start measuring homes by the American National Standard of Measuring. And what that meant is that typically in the past, builders and appraisers were measuring differently, and they were trying to get everybody on the same measuring field for consistency. So in the past, if you had, say, for example, a colonial and it had a living room with an open to above, some tax assessors, some builders, would include that in the overall square footage. But as an appraiser, we can't walk on it. We can't do anything in that area. So now we have to back that out of the square footage.

So for some tax records, when you looked at them, it would say the house was 4,200 square feet, but when you're there, it's really 3,600 square feet. So these people were getting taxed on the 3,900 square feet as opposed to what was actually the measurement of the house. 

And as far as ceiling height, before, in older homes, it could be 5' 5" or 5' 4", and tall people had to duck or short people didn't. And right now there's a standard that it has to be, from the floor to the ceiling, it has to be seven feet in order to be included in your overall square footage, of a basement as well as a Cape Cod. Cape Cod is the main level, and then the second level is half of the first. And now it has to be seven feet, and 50% of the ceiling has to be seven feet in order to include that as well.

Victoria Ray Henderson:

So for those of you not familiar, a Cape Cod has angled ceilings on the upper level and the two little windows, the dormers, in the front. And what you're saying is if it's less than 50% of that square footage, it can't be included. 

What are the ways that you go about appraising a property?

Dawn Marie Miller:

Sure. There's three approaches. There's the sales comparison approach, which is the sales grid, and you would input the comparables that you feel are apples to apples, oranges to oranges, and most comparable to your subject. 

There's the cost approach, which is either a reproduction or a replacement. And really that approach is for any home that's under 10 years old, because once you get over 10 years old, those cost figures don't really correlate to the value of the property because of depreciation. 

And then there's the income approach, which is what a home would rent for. And there's a capitalization rate that we would factor in.

And that typically is more for investment properties. So in today's market, and even with VA, they require you to use the sales comparison approach because that's your more recent market data. 

Because typically the appraisal itself is a snapshot in time. Once you leave that property, it could change, because another sale may have happened. And that's something as appraisers that we have to determine because if we're in an increasing market and we know that there's a percent of increase, we have to add that percentage to the recent sales, as well as a declining market. So it's really just that snapshot in time.

Victoria Ray Henderson:

I have one question that has come up quite a bit with some of my clients, and that is egress. How does egress factor into the evaluation that you do? And also maybe give a brief overview of what egress is.

Dawn Marie Miller:

Proper egress is the ability to exit a room, for fire hazard, for safety. And to be able to be called a bedroom, it would have to have two proper exits. You would have to be able to exit from the inside to the outside, and also from the inside to another portion of the house. 

Now, a lot of times you'll find in basements, the agent will call a room a bedroom because it's got a window and it's got a door into the basement area. 

However, each area has their own code for proper height of a window. And that's very important for agents to understand...

I just had one the other day where it was in Virginia and it was a basement. And they had a legal bedroom because it had a complete exit out a door to the outside and it had a door into another portion of the rec room. But they had two windows at the top of the basement wall. And she kept saying that it's a bedroom. And I'm like, "Well, it has to be 44 inches from the ground up to be called a legal bedroom." So in that case, we just called it another room. 

Proper egress could affect value because if it's not a true bedroom, then you're not going to get that value of a true bedroom.

Victoria Ray Henderson:

Okay. This question centers around the value of a home based on the appliances, the furnace, the age of the roof. How do you factor all of that into your appraisal?

Dawn Marie Miller:

Sure. A lot of updates and upgrades are going to affect the value based on the effective age. And when I say that, is that each home has a true age of when it was built and then the effective age of all the updates and the upgrades made to the property. So you could have a 50-year-old home, but it looks like an 8-year-old home because it was just renovated. If they're newer, recently renovated, then they're going to bring the effective age of the house down. And you're going to compare that to a house that has the newer roof and the newer furnace and the newer appliances. 

Coming up with a range of three comps and you're going to the higher end maybe if all those items are new. And if they're older, then you're going to go down to the lower range within your value.

So an accessory unit is when a section, I'll give you an example, colonial, you've taken the basement and you've put an in-law suite in there. Well, if you have an in-law suite, but you can access the basement from the main level, then it's not really an accessory unit, it's an in-law suite. Because you can still walk from one section of the house to the other section. 

When you have an accessory, you've actually cut off access to that unit. So that's the difference, is that are you able to access that area? If you can, then it's not an accessory unit. If it's completely blocked off and it's inferior in square footage to the main dwelling, then therefore it's an accessory unit. And in that case, what you have is almost like a two-unit family dwelling. 

And lenders, typically, you can use an accessory or the loan on an accessory, one, if it's legal. But you also have to provide a comparable accessory.

So if you're in Montgomery County and you're in the neighborhood of Kensington where it's not common, well, that's going to be a problem. You have to provide at least one home that has an accessory to determine, one, if it's common in the marketplace, and, two, will it resell, and what's the value difference? Because once you break that off from the main dwelling, you can't add that square footage back into that dwelling. 

An accessory versus a two-unit is how the utilities are as well. An accessory is still feeding off of the main dwelling's water, electricity, where a two-unit has a similar setup, but they're completely metered separately.

There are a lot of changes going on in the market right now... they're looking at using individuals to go out to properties and do a sketch and take photos of the property. But they're not licensed. They're just somebody that somebody has hired for $15 an hour. They're going there, they're measuring, they're taking pictures. They're then sending it to an appraiser to write up the data, which a lot of appraisers right now are not accepting because it's too much of a liability.

When you talk to a lender, you want to ask if the appraiser is  licensed or certified. Licensed being an appraiser who has met certain criteria and has passed the license portion of being an appraiser. 

Where a certified appraiser is somebody who has more education, more knowledge, and has been an appraiser for a long period of time. That is really what you're looking for is somebody that knows the market, knows the ins and outs of the business, in order to give you a proper appraisal. 

I think it's important to understand that we pull the comparables from the market and we just don't make a value up.

We are actually using the most recent sales in the market to determine the value. When you look at an appraisal and when you're buying a home, you see the three comparables that are provided, and there's a range of value that your home could essentially fall anywhere within that range. And at the end of the day, you basically... It's just that snapshot in time. You could increase in value from that moment on, or you could decrease in value from that moment on. And it is an opinion of value, but we are pulling it from the market and just based on our experiences where we see that value.

‍

Intro/Outro:

You've been listening to Listen Up Home Buyers, the only podcast offering home buying advice and tips from true buyer agents.

How can we help?

The exclusive buyer agents at HomeBuyer Brokerage specialize in serving home buyers. Please reach out with questions at info@homebuyerbrokerage.com.