David Hultin
New Mexico Bank & Trust
The appraisal process is more involved and more complicated than most people are aware. They see the appraiser visit the property, take a couple of pictures and leave, and they think that he then goes to his office, types up the report and can now spend the rest of the day drinking beer. Not so. Let’s take a look at the process as it should occur.
The appraiser makes a physical inspection of the property to understand the exterior and interior condition and measure it to develop square footage for comparative purposes. The appraiser will ask the homeowner or realtor what improvements have been made (roof? Stucco?), look at the complexity of the floor plan and assess amenities and the quality of the interior. This will be used to help develop an “effective age” of the
property. If, for example, the home was built fifty years ago, but has had recent extensive remodeling, the effective age may be only a few years, not fifty. This will be a key component in establishing a value for the property. The appraiser then returns to the office and the hard work begins.
In a perfect world, the appraiser would find three comparable properties that have sold within a mile of the subject property in the last six months. In an area of homogenous housing such as Albuquerque, this may be possible, but far less likely in Santa Fe (an appraiser of thirty years experience with seventeen in Santa Fe told me that Santa Fe is the most complex real estate market in the Southwestern US to appraise). In Eldorado, for example, an identical house may well be three miles away, yet in the same subdivision.
Moreover, in times of diminished sales, the six months may not be reasonable. So the appraiser will make adjustments and explanations as to why the location or date of sale of the comparable goes beyond the preferred range. To find suitable comparable properties, the appraiser must have local knowledge and experience to understand what neighborhoods represent similar value as the subject property. This is a most important element of the appraisal process and follows the “jurisdictional competency” rule of licensed appraisers: if they do not know the real estate market in question, then they are required to seek assistance from an appraiser that does. Information on sold comparable properties can be derived from the Multiple Listing Service (MLS) of the local realtor association. Short sales are identified as such in the MLS data and are not used, considered an anomaly to the appraisal process. If you think values have declined in your neighborhood because of short sales, it is not so. But if the short sale were to become the predominant type of sale, they then might be used.
Once the comparables are identified, the appraiser then has to visit those properties and take photographs to include in the appraisal report. Each complete appraisal valuation can take six to eight hours to complete.
The condition of the property, the effective age, and the location are the most important characteristics in ascertaining the value. Extensive landscaping may help sell the property more quickly, but it does not add significantly to the value. If a homeowner were to ask an appraiser today why home values are decreasing, he would likely answer “supply and demand”. Basic economics: the supply exceeds the demand.
