How do appraisers make value adjustments in their reports?

Have you ever wondered how appraisers make adjustments in their reports? Where do they get the numbers? Do they just make them up? Let me give you a little insight by comparing two model matches on the same street in Rancho Cordova.

Zinfandel Drive sale in Rancho Cordova - photo by Sacramento Appraisal Blog

House on Zinfandel Drive - photo by Sacramento Appraisal Blog

Comparing two houses: Both of these homes sold in a very similar period of time and had the exact same size. They are model match sales, though the exterior has a slightly different roof design above the garage. All things considered, one property was renovated throughout and sold for $160,000, and the other one was VERY average, which means it was outdated but in decent shape. The spruced-up house ended up selling for 26% more than the house in average condition, which means buyers were willing to pay $33,000 more for all the additional upgrades (this helps us see that cost and value are not always the same). In this case the updated house sold for $160,000 after an investor had previously purchased it for $100,000 on the court steps. The numbers could work to flip the property because there was enough of a difference between acquisition cost and resale value – and some of the repairs may have already been there too.

Anyway, how do appraisers make adjustments in reports? We know the market paid 26% more for the remodeled property, so this adjustment would be very easy to do since there are really few differences between these two properties other than condition. The appraiser probably shouldn’t be using these two sales in an appraisal report since they really aren’t competitive, but if that did happen, the adjustment for condition would be $33,000 because that’s what the market was willing to pay for the difference in condition (the appraiser would call this the “reaction in the market” to condition).

Built-in pool photo - by Sacramento Appraisal BlogOther non-model match examples & built-in pools: It would be a simple world if we only dealt with model match sales, but that’s not always the case. Say we found another rehabbed sale that had a GLA (Gross Living Area) of 1450 and sold at $167,500. We could then compare the renovated house above with a GLA of 1322 and a price at $160,000 to determine that 128 square feet (1450 minus 1322) is worth $7,500 – assuming there are no other differences. If this pattern kept showing up in the market, the appraiser would probably be making square footage adjustments at 55-60 per square ft since the difference here was 58.60 per square foot. The same holds true when comparing the number of garage spaces, bedroom count, lot size, or location. Appraisers analyze other sales and data in the neighborhood to decipher what buyers are willing to pay for a certain feature. You may have noticed I keep mentioning what buyers are willing to pay rather than the cost of something. That’s a key point in how appraisers should make adjustments since they are essentially interpreting how buyers in the market respond to various features (as opposed to the cost of something or simply making up numbers- which I know happens). A last and perfect example would be a built-in pool with an adjustment in the appraisal report that is often somewhere around $10,000 (despite a much higher cost to install a pool). Buyers are simply not willing to pay the entire installation cost of a pool in the resale market, so appraisers find what they are willing to pay by comparing houses with and without pools – and then extract an adjustment.

I hope this makes sense. Let me know if you have any stories or specific examples to share. I’m open ears.

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Comments

    • says

      Thanks so much Tom. That’s a good argument to make, and one that most people will be able to understand. I also tend to mention AC units in Antarctica too as a way to discuss making the right type of improvements (and also that the cost of certain improvements don’t always yield any value in the market).

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