THE REAL ESTATE EVALUATION PROCESS – CONFUSION OVER METHODS
At times I am confronted with potential clients misunderstanding the evaluation process that Realtors employ in assessing a property’s current market value. They sometimes wonder why the evaluations we Realtors conclude are different from the value given to their property by a professional appraiser, their county or city’s tax assessment department or the value given by their insurance company. The differing property value numbers can be quite confusing, and, in this article, I am endeavouring to bring about some clarity.
APPRAISAL
An Appraisal is done by a Certified Appraiser who is paid to provide an unbiased estimate of the value of a home. Lenders order them to ensure that the home is worth what a buyer is paying for it, within reason. They can also be called for when a person is looking to an accurate evaluation done for estate planning purposes, disposition of property in marital settlements, or for a revised evaluation of a property’s value after significant improvements or renovations have been undertaken.
Appraisers most often use the Direct Comparison Approach and usually choose only 3 properties that have sold (up to a maximum of 6 months ago to keep current). They do pluses and minuses for differences in property characteristics to align with the subject property and conclude an appraisal number that is usually conservative and largely based on historical data. They may also use The Cost Approach where they set values on the improvements based on their current age and condition. They may then blend the values derived from both approaches to get a final number. Bear in mind Appraisers will likely not have seen the properties chosen as comparables since they are not viewing listings and past sold properties as we do as Realtors as part of our profession and ongoing market awareness activity. Consequently, I believe that Realtors’ evaluations are more market sensitive relative to setting current listing values.
REPLACEMENT COST ANALYSIS
Another significant confusing issue for sellers is the tendency to place heavy reliance on what their insurance company has presented to them in their property insurance policy. The value given by insurance companies is to reflect what it would cost to replace a home and other structures on the property should they be damaged or destroyed. It is based on current construction costs which could be up to as much as 30 – 40% more than the dwellings actual current depreciated value.
While we Realtors need to keep in mind a home’s replacement value at today’s construction costs, we cannot use these figures for their current home values when evaluating a property or we would drive market values beyond current reality.
MD OR CITY PROPERTY TAX ASSESSMENTS
These can add further confusion to a property owner. Tax assessments are usually lower than current market values and are more often than not set without an assessor actually viewing a property. They are done using averaging every year or two as the counties and city try to update their values to keep track of market changes. However, they are seldom equal to or higher than actual, current property market numbers.
We come then, to how we Realtors assess a property’s current market value:
REALTOR COMPARATIVE MARKET ANALYSIS
We Realtors do take a Comparative Market Analysis (CMA) approach, but we will often look at several properties, not just 3, and we do subjective overrides based on actually seeing and knowing many of these properties. We have first-hand knowledge of market trends and what is currently happening in the market such as competing offers, market euphoria, scarce listing inventory etc., all of which have an impact on what is driving pricing up or down. The challenge is to not overreach in setting a realistic market value particularly in a ‘sellers market’ which we seem to be still in.
One should be aware that different Realtors can come up different suggested listing prices for a property because of some having better product or area knowledge or a realtor may be too optimistic setting price to secure the listing if in competition against other agents. It is also true that a Seller may in fact influence the price based on opinions derived from internet surfing or hearing of what a friend or neighbour’s property sold for.
In summary a Realtor Comparative Market Analysis should be the most appropriate of all methods in setting a current listing price and to get a proper sense of current market value as it is based on very current market sales data and market activity.
By Wayne Chaulk
