Understanding the Guidelines of the Appraisal Process
The appraisal process often puzzles our clients. They may feel that their home is worth a lot more, so they don’t always agree with the appraised value. It is important to know that the appraiser is completely independent from lenders, buyers, sellers, and real estate agents. The guidelines to which they adhere are dictated by the Uniform Standards of Professional Appraisal Practice (USPAP) and Fannie Mae. In most states, the mortgage lenders must also disclose the purpose of the appraisal (i.e. sale, refinancing, court settlement, etc.) because each transaction has its own sets of rules & regulations to follow.
These principal guidelines help appraisers put a fair market value on homes based on comparable sales in the same area, and the home must be similar in size and value.
For example, there is no set value for a property with a great view, pool, spa, bathroom upgrades, etc. If a homeowner installs a custom pool that cost them $30,000, but the local marketplace supports the value of a pool at $15,000, then that item will be priced at about $15,000 on the appraisal.
Upgrades can usually be expressed at a higher percentage of their value in newer homes because the only way to obtain the upgrades was to put more money into the cost of building the home. On the other hand, the upgrading or remodeling of an older home is rarely reflected in full in the final appraisal. This is because typically 25-40% of the project involves demolition and the fixing of issues that aren't uncovered until the project has already begun, such as plumbing or wiring that may need updating.
In the end, the value of the upgrades must be supported by comparable examples within the same market. These comparisons must be drawn from current market activity within the last six months. This prevents appraisers from attaching too high a value to the home in question, and opening up the appraisal for review. This guideline further states that appraisers can only base their opinion on the value of home sales that have actually closed.
Source: Mortgage Master Service Corporation – Kent, WA http://www.mortgagemasterwa.com/appraisals.htm