You just took a sledge hammer to the wall of your tiny kitchen which has been confining you for years!!! AHH! The feeling of liberation! Your kitchen expansion project is underway! Wait a second…you need some cash to finish the project, so you decide to refinance. But does the project need to be complete before the bank will lend the money?
Unfortunately, I can’t answer for the bank. However, I can let you know some appraisal terms that come into play. “as-is” value and “subject to” value.
What do “as-is” and “subject-to” values mean?
• “As-is” value – An estimate of the market value of a home in its current condition, use, and zoning.
• “Subject to” value – This is what the value will be whenever certain conditions are met. It is determined by taking into consideration the proposed improvements.
If the as-is value (broken wall and all!) is acceptable to the bank, they may lend! However, there is one caveat…The appraisal report must identify and describe physical deficiencies that could affect a property’s safety, soundness, or structural integrity. If the appraiser has identified any of these deficiencies, the property must be appraised “subject to” completion of the specific repairs or alterations.
Two major take aways: 1) how much has your home value dipped considering your property in its current stage of renovation and 2) does the current stage of renovation represent a health and safety risk!
In the context of selling your home or buying a home, what exactly is market value? This sounds like a really simple question. Someone might respond, “market value is the price that someone is willing to pay for a home”. However, there are other factors that must be taken into consideration.
Here is a definition from the Fannie Mae Selling Guide (This definition is also stated in most appraisal reports related to mortgages)
Definition
Market value is the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.
Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby:
buyer and seller are typically motivated; both parties are well informed or well advised;
each acting in what he or she considers his/her own best interest;
a reasonable time is allowed for exposure in the open market;
payment is made in terms of cash in U.S. dollars or in terms of financial arrangements comparable thereto;
the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.
One main take away is that for it to be said that a home was sold at “market value” five conditions have to be met.
Real world application of this point
If a home’s prior sale price was not market value then an appraiser should not use that prior sale as a comparable.
A financial crisis could happen to anyone at any time. If you have to file for bankruptcy, and you are a homeowner, how does your home come into play?
A bankruptcy filing includes forms called schedules. Your schedules must list the value of each item of property you own. The legal standard for home valuation in bankruptcy is fair market value.
At this point, you might be thinking, “Can I simply put my best guess of my home’s fair market value?” The answer is, “Yes” you can. Unfortunately, your best guess may turn into a big mess if it totally misses the mark . In addition, it may not be able to stand up under scrutiny.
Three Ways to Determine Fair Market Value – and their associated cost
Formal appraisal – $$$
This involves hiring a real estate professional to come to your home, inspect it, and run an analysis of the market in your area. The appraiser will then provide a report that indicates a professional opinion fair market value for your house.
Formal market analysis – $$
This is a second, but less accurate option. A real estate professional will look at market conditions in your area and analyze recent home sales and current home listings in your area to determine what your house would likely sell for. If homes were apples, the formal market analysis method would be like finding out which isle in the grocery your apples are located in, and what the average price of apples are. The formal appraisal method would be like a report telling you the price of your specific apple (i.e. red delicious) and perhaps how that price compares to other apples.
Local listings comparison – $
This is a third method of determining fair market value. Let’s call it the do-it-yourself method. You review real estate listings in your neighborhood and estimate a value for your own home (taking into account the condition of your home) based on what other houses in your area are selling for.
Selecting the valuation method for your situation will depend on your purpose. The more important your home value is to your situation, the more thorough and formal a method you should choose.
When I prepare appraisal reports for buyers who are wondering if their potential home purchase is worth the ticket price, I often include homes that are currently listed for sale.
Why include listings and what other number must you consider?
Why include listings? – This gives the client an idea of the price that other people are charging for homes similar to the one they are thinking of buying.
Besides price what other number should be considered? – Besides the price tag, another very important piece of information is the DOM – Days on Market.
This lets you know how long a home has been sitting on the market. The higher the DOM, the longer it has been sitting.
This suggests a problem selling the home, perhaps it is over-priced.
Bottom line: prices of homes that have sold, that are comparable to the one you are thinking of buying, are key indicators of value. However, two other category of numbers that must be considered are 1) list prices of homes on the market as well as 2) their respective DOMs, as these can let you know when a home may be overpriced.
If you have an appraisal business, you’re constantly looking for ways to be more profitable. Well, its possible that an overlooked way is sitting right on your desk! It’s that little or big piece of paper (sales contract, county assessor’s document, etc.) Do your really need a paper copy? How much money is it costing you? A box of paper at staples, 500 sheets, is approximately $15. If you go with the premium stuff, it could run you $45! So clearly the elimination of paper equals a reduced business cost. That’s the first benefit!
Another benefit is a more efficient workflow. If you are waiting for a piece of paper, such as your letter of engagement to be signed, it’s a lot faster when you can send it to be signed electronically, than having to print it for signing at inspection.
Lastly, you’re helping to preserve the environment by having a greener workplace. So here are six steps to help you get started on going green and paperless:
Get everyone on board. Explain why there is a need to go paperless and its benefits for your business. Present ways of how the office will have to change the system of creating, exchanging and storing documents.
Create copies of important existing documents and store them in Google Drive or Evernote. Start using these online tools for storing internal office documents.
3. When working with clients and vendors, ask for digital versions of documents. Always opt for email rather than mailing hard copies.
4. Invest in software and training. I use Total for Mobile to do all of my appraisal inspections. I can take photos, enter property characteristics, and complete an amazing sketch all in the palm of my hand without a pen! It then syncs perfectly with my computer at the office.
For digital signing, my go to app is SignNow. Plan and determine what type of app, database, or system would be right for your business and have employees go through training so that the whole office will be able to file and access information digitally.
5. Get started. Manage the switch so that the paperless system is maintained, but also have the office address flaws in the transition that may need to be optimized.
6. Inform clients. Your clients will need to know and adjust to your switch to paperless so that they may expect documents shared electronically going forward.
For me, personally going paperless has been liberating! I am required to keep a work file forfive years, and with the security features in place with many cloud-based storage apps, my info is better protected there than in a file cabinet in an office basement.
Don’t get me wrong, paper still has its place, and its going to be around for the foreseeable future. However, going paperless as on overall business strategy can be a big step towards saving your appraisal business time, money, and space. At the same time, it gives your documents better security. Following these steps, both you and the environment win!
To find out more about how I run my paperless office, or to order an appraisal, you can reach me at 502-309-2323 or at conrad@choiceappraisals.org.
Prospect is a friendly and inviting area so you shouldn’t have any trouble fitting in. But what should a Louisville appraiser or anyone considering a real estate purchase there know? Here’s a brief neighborhood profile to give you an idea of what it’s like to live in Prospect:
These are just a few things you should know about your potential new home. If you find this information interesting or useful, please like Choice Appraisal Services, LLC on Facebook and please support us by making Louisville real estate appraisal related comments on our blogs and YouTube videos.
