Yesterday I had a chance to sit down with an appraiser that I highly respect, and pick her brain about common misconceptions about property valuation and appraisals. Here are the two biggies:
#1: Appraisals are for the home buyer. Nope. The home buyer may pay for it, but the appraisal is for the bank. The bank wants to be sure that if a borrower defaults on the loan, the bank can recover their money—they want to be sure the collateral is sufficient to cover the debt, minus foreclosure fees, marketing fees, etc. Sure, you are entitled to a copy of the appraisal by law, and if you take time to read through all 25+ pages of it, you get some good information and cool pictures, but its primary purpose is to make the bank feel all warm and fuzzy about lending you a lot of money.
#2: The price per square foot of a comparable sale does NOT mean you can multiply that dollar figure by the number of square feet in your home. For example: A house in your neighborhood sells for $300,000 and has 1500 square feet, or $200/sq ft. Your house has 1700 square feet, so it should be valued at $340,000, right? No! Even if everything else is the same (i.e. number of bedrooms, bathrooms, lot size, etc.), you don’t get a dollar for dollar benefit for more square footage. The primary reason is that the price per square foot that a house sells for INCLUDES the value of the land—which in most cases represents around 25% of the total value, and even higher in the case of larger pieces of property or property with extraordinary views or location. There are also other more complex factors that affect the actual adjustment that should be used for different square footage homes, such as functional utility and diminishing returns, but there is a good general rule to apply. The square footage adjustment follows this formula: Cost per square foot to rebuild x 50%. So let’s say in our example above that the cost to rebuild these two houses is $140/sq ft. The adjustment that you would use is $70/sq ft, thus making the value of the larger house $314,000. Big difference. This misconception is perpetuated even further by all of the property search web sites, such as RMLS, Zillow, Trulia and Redfin. They ALL list the price per square foot. Which means, they all provide valuable information to assist you in comparing apples to monkeys.
If you’d like to know the value of your property, or one you’ve had your eye on, give me a call!