Valuing a Home
There are three methods of evaluating a home price:
Yahoo, Zillow, Google Earth and several other automated valuation models can be found on the web. Each has benefits and detriments. The primary limitation to online valuation models is that they are generally dated. Many are based on Freddiemac data which runs 3-6 months behind. Good if the market is stable. Not so good if the market is rapidly heading either up or down.
- Broker Price Opinion / CMA
A Comparative Market Analysis (CMA or Comps) uses a quick overview of an area to approximate the sale value of a home. This is generally how Realtors determine market value for Buyers and Sellers. CMA's are provided by PSR agents for free on request and generally can be prepared in 24-48 hours.
A Broker Price Opinion (BPO) is a CMA on steroids and is the most accurate estimation of value a real estate agent can provide. These are generally requested by lenders interested in knowing what the general value of a specific property might be. BPO's are often used, for example, to determine whether or not Private Mortgage Insurance (PMI) is still necessary.
Exterior BPO's consider only the outside appearance, readily visible functional obsolescence or deferred maintenance, and area comparables. Interior BPO's take pictures of the inside of a home and evaluate price based both on comparable properties and the total condition of the home. Exterior BPO's require a trip to the subject property and comparable properties and can take 1-2 hours to prepare. Interior BPO's require all that is done for an exterior BPO, plus cost estimating any interior repairs required and a more accurate assessment of true value. Interior BPO's can take 2-4 hours depending on format and requirements of a lender.
Appraisals are conducted under very strict guidelines and must be completed by appraisers licensed in the state in which the subject property resides. They are guided by rules adopted during the Savings and Loan crisis of the mid eighties called the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA). Lenders use appraisers to determine potential loan value of a property, but may not guide or direct an appraiser's conclusion. RESPA, a federal law regulating title, real estate and lender relationships, disallows a lender from interfering with value either up or down. Lenders and Realtors may provide guidance in the form of known data or comparables, but enticing or influencing an appraiser's valuations is a violation of law.
Residential appraisals can run $250 to $500. It is not unusual for Commercial Appraisals to be thousands of dollars. Time frame for residential appraisals is one or two days while commercial and land appraisals can take weeks.
Appraisals are conducted as of a date specific (appraisal date) and changes in values after the date of appraisal may not be used. Fraud during the housing crash of the late 2000's will probably result in even greater scrutiny and lowered appraised values. Like a pendulum, appraisal will swing too far in one direction before swinging too far in the other. Appraisers are right most of the time but have difficulty when the market is either very hot or very cold.
