How home appraisals are calculated
WBEZ’s been looking at why some Chicago neighborhoods aren’t recovering as quickly as others in this post bubble market. As we reported over the summer, part of the measure of a neighborhood is the value -- or appraisal -- of the property there.
So exactly how is that value measured? I tagged along with an appraiser to find out.
“What is the home consisting of? How many bedrooms, how many bathrooms? What’s the floor plan? What’ the quality of the interior,” said Michael Hobbs, president of PahRoo Appraisal and Consultancy. “Then, how does that as a package go together and how does that compete with others in proximity.”
He said it’s not just about walking through a house. It’s also hours of research and looking at comparable properties in the area.
One of the properties we looked at was a bungalow in the city’s Albany Park neighborhood. It was originally listed at $329,900.
Before we even stepped inside the house, Hobbs sized up the neighborhood to see how this house fits in. The block had a mix of single-family homes and two flat rentals.
“If you look around you can see there’s a couple frame properties on the block, a few stucco, but most of them are brick,” he said.
Hobbs also took note of recent tuck pointing work, updated windows and gutters.
A placard on the front door notes home’s historic bungalow designation.
“The first thing we notice as we walk in is the original wood work that’s still here, from the flooring to the doors,” he said.
Some other original features include vintage brass handles and a certain crown molding common in the early 1900s when the home was built.
Hobbs took note that the sellers made efforts to preserve these touches to maintain the bungalow’s historic status.
He made note to research what the demand is for vintage properties in this micro market.
The kitchen also has a retro look.
“This is quite typical for the age. You can see the metal sink, original metal cabinetry,” he said.
It’s flanked with yellow tile backsplash and a green and blue tile floor. Behind us is a breakfast nook right out of a 50s diner.
“We measure the perimeter of the home. We’ll start in one corner and literally measure our way around the property. We make a full floor plan and sketch, and what we’re noting here as we’re walking through is that this home has 3 bedrooms on the first floor and a bathroom,” he said.
The homeowners could’ve paid for updates, but Hobbs said that cost wouldn’t necessarily result in a higher market value.
“There’s almost no home improvement project that returns 100 percent of the cost to the actual owner. And that’s an important clarification for a lot of people. Just because you spent $50,000 doesn’t necessarily mean you’re going to get $50,000 back,” he said.
The home has a large unfinished basement that’s mostly dingy, storage space. But it also includes a finished portion with wood paneling--think VFW hall. Hobbs also made note of the water heater and boiler, not to inspect them, but to make note the home has them.
In the backyard, there’s no lawn or garage, but there’s a concrete patio and enclosed parking pad.
“The first thing I see is how much shorter the neighboring homes are,” Hobbs said.
He points out the home’s larger back end and wider lot than those nearby.
Back inside, the second level of the home opens up into a large red room with white trim and built in shelves, reminiscent of an old classroom.
“As we can see based on the plywood on the floor and the wear on it, this has been here for an awfully long time,” Hobbs said.
For home buyers looking to get a mortgage loan, banks often require an appraisal.
Regulation post housing crisis is set up to safeguard against collusion between appraisers and bankers, a problem in the past. So now a third party, an appraisal management company assigns the jobs.
Hobbs said that’s sped up the closing of the home deals, which is good for buyers and sellers, but can limit an appraiser’s time for thorough market research.
“So we have to make some assumptions. And therefore we end up completing reports in a shorter amount of time and with maybe less of the information we more traditionally would have had because the push is faster, faster, faster,” he said.
Hobbs said people often criticize appraisers for the short time they spend looking at a property.
“You were only in my home for 30 minutes or 45 minutes or an hour, how do you know how much it’s worth? I’m like, we got to go do research,” he said.
That means looking at comparisons or comps nearby. How dissimilar are they and how much might those features change the value of the home we’re appraising?
“So it’s a matter of both looking back in terms of what has closed. Looking laterally…buyer activity has chosen that home instead of this one. And then what’s active. What’s ahead of us in the form of what this buyer looks at as alternatives,” he said.
Appraisers get the buyer/seller contract before viewing the property. Hobbs said the appraisal and contract price often end up being the same. He said that doesn’t necessarily mean the appraiser was influenced by the offer price. Rather, buyers and sellers have more access to information to make a more informed valuation for themselves.
“Really the appraiser is coming along and documenting the activities of typical buyers and sellers to really confirm that one person isn’t way out there,” he said.
Here’s your chance to make an appraisal.