How Residential Real Estate is Assessed
You're under contract with a home buyer using a mortgage loan to sell your Gwinnett County, GA Home for Sale, or you're very far along in the process of refinancing your loan with non-refundable funds already paid for an appraisal. But the appraiser's assessment of the property came in lower than the agreed-upon sales price or expected refinance amount. Now the purchase and sale contract is at risk of termination if you cannot reduce the price, the buyer is unwilling or unable to contribute funds to cover the shortfall, or refinancing no longer makes sense. Both scenarios occur regularly and needlessly, and learning some of what's involved in appraising a home will go a long way toward avoiding them.
Characteristics that Influence the Value of Real Estate
Several economic principles affect owner-occupied residential real estate values. Here are a few Characteristics that typically influence the value of real estate.
Characteristics of Property
To have value, the monetary worth based on desirability, a property must have the following characteristics.
- Demand: A desire or need to own a property, supported by the financial ability to do so.
- Utility: The property’s usefulness for its intended purposes
- Scarcity: a finite supply of similar properties
- Transferability: The relative ease with which ownership rights are transferred from one person to another.
Characteristics of Land
- Scarcity: The total supply is not limitless. The supply or quality of a parcel in a particular location is usually finite.
- Improvements: Buildings on land affect the use and value of that property and of surrounding property.
- Permanence of Investment: Investments in drainage improvements, utility connections, and easements remain and continue contributing to the value of a parcel long after the removal of a structure built upon it.
- Location: Home buyers prefer an area based on their own requirements and may consider the area's unique qualities, including its history, reputation, convenience, appearance, and geography.
Other Characteristics that Affect the Value of Residential Real Estate
- Anticipation: Anticipated area changes often influence property values. For instance, improvements to a long-neglected property may enhance neighboring property values, while changes that disturb the quiet enjoyment of nearby homeowners may negatively affect values.
- Conformity: A property that is consistent in age, construction, design, and size, and is otherwise in harmony with its surroundings, and existing neighborhood standards, adds value.
- Contribution: The value of any part of a property is measured by its effect on the value of the whole. Regardless of the expenditure, a property will only appreciate to its maximum value. The remodel of a dated kitchen will likely add only a point in value, but excessive expenditure on appliances, decor, etc., will not add more value. In fact, the basement the owner finished may not add value to the property equal to the amount paid to finish it.
- Regression: The value of a nearby higher-quality property may be adversely affected by the presence of a lower-quality property nearby.
- Progression: A modest home may benefit in value from the presence of higher-quality nearby homes.
The Sales Comparison Approach to Determining Value
The sales comparison approach, commonly used for owner-occupied residential properties, estimates value by comparing the subject property to similar nearby properties that recently sold and adjusting for differences. Appraisers may consider differences of three recently sold comparable homes nearby in:
- Property Rights – Whether the full bundle of rights was conveyed, for instance, a land lease, ground rent, life estate, easement, restrictions on the deed, and encroachments.
- Financing Concessions – Whether cash, a mortgage, owner financing, or another means of consideration was used to buy a comparable property.
- Conditions of Sale – Whether the owner was compelled or incentivized to sell the comparative property, if the transfer was between relatives.
- Location – Whether there is a significant difference in neighborhoods.
- Amenities and Features – Whether there is a difference in age, condition, size, or other features of the property.
While the Cost and Income Approaches are used in different circumstances, the sales comparison approach is considered the most reliable for owner-occupied residential properties and is the one most used by appraisers when arriving at a value, and by real estate agents, often referred to as a comparative market analysis, when determining a suggested list price.
In Closing
Use this overview of the home assessment process to limit devastating surprises at the worst imaginable time and better understand how real estate agents arrive at suggested list prices and how appraisers determine value. If you find it helpful, please like and share it on social media so more homeowners are encouraged to price their Gwinnett County, GA Homes For Sale to sell fast, smoothly, and for more.
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If you're thinking about selling or know someone who needs a listing agent to sell their Gwinnett County Home fast, smoothly, and for more, please call me at (770) 271-2156.
