Want to know how and when condition ratings affect home value?
This post is all about what happens to market value when the property condition is ignored, a priority or misrepresented.
Every appraisal report is different and so it’s sometimes tough to answer a homeowner’s question when they want to know what things will affect their home value.
I mean, usually we can rattle off a few things that will pack a punch in the market value (either up or down) but these last few years have been anything but usual.
So, for now let’s focus on one thing at a time.
You are going to learn about all about what happens to your home value when the property condition is ignored, a priority or misrepresented.
Plus, I am going to give you a 20 second pro tip in making sure you are receiving the professional service that you deserve when paying for a home appraisal.
This post is all about how and when condition ratings affect home value.
What Determines Home Value?
Some people believe that if a Buyer is willing to pay a certain amount of money for a house then that must be what it’s worth, right?
Sorry, but that’s not always true.
Market Value is defined by The Appraisal Institute as: “The most probable price, as of a specified date, in cash, or in terms equivalent to cash, or in other precisely revealed terms, for which the specified property rights should sell after reasonable exposure in a competitive market under all conditions requisite to a fair sale, with the buyer and seller each acting prudently, knowledgeably, and for self-interest, and assuming that neither is under undue duress.”
Fannie Mae’s definition of market value also includes the phrase: “the buyer and seller, each acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.”
In 2020 through 2021 we experienced unprecedented shifts in the housing market causing home values to increase at a fast pace.
The lack of inventory combined with record-low interest rates created an “auction” type of atmosphere causing a price competition between multiple buyers.
When there is a price competition, it is possible that the accepted agreement of sale was offered by a distressed buyer.
A distressed buyer is NOT defined as “acting prudently, knowledgeably and assuming the price is not affected by undue stimulus.”
Distressed buyers weren’t very concerned about home values in 2020-2021.
Their main priority was this: Get a seller to accept my offer because I need a place to live and the options are slim to none. Period.
As a result, one item that typically affects home value was completely thrown out the window.
Condition.
Not always, but it happened… a whole lot.
It happened so often that our appraisal reports went into great detail about the phenomenon.
How Do Appraisal Condition Ratings Affect Home Value?
When completing appraisal reports for private clients we use words like Excellent, Very Good, Good, Average, Fair, Poor to describe the condition of the property.
When completing appraisal reports for (most) lenders we are required to describe the condition as C1, C2, C3, C4, C5, C6. These property condition ratings have very specific definitions.
Over the last few years I noticed the market reaction to the difference in condition was increasingly $0 because of the housing shortage combined with the low interest rates.
Which means, the buyers were willing to pay the same amount for a well-maintained house as they would pay for a rehab.
Or, they were offering to pay the same price for a house that needed a lot of work as they would have paid for a well-maintained house.
Buyers ignoring the condition of the house drove the home sale prices up even higher.
So, a person could have bought a rehab in 2018, not take care of it, even beat the heck out of it, and sell it in 2021 for way more money, in far worse condition. And no one batted an eye.
But, times are a changin’ my friends.
And, even though we are still seeing a shortage of homes for sale, the buyers no longer appear to be distressed.
Waiving home inspections is a thing of the past. Thankfully.
And, sellers that are currently trying to pass off that beautifully rehabbed house they bought in 2019, lived in it without caring for it and degrading the condition over 3 years, are now discovering they need to fix what they broke during their ownership, plus the home value has been negatively affected.
Because the market reaction to the difference in condition is rarely $0 now.
The buyers are no longer willing to pay rehabbed sale prices for a house that is not in rehabbed condition.
And, despite the continued shortage of homes for sale, the number of days it takes to sell a house is steadily increasing in the Philadelphia and suburbs housing market.
Matter of fact, the median sale prices for the city of Philadelphia are at the lowest they have been in over a year.
What’s My Home Worth?
Many people call our office wanting to know their home value not realizing there are different types of appraisal reports.
This is why, one of the first questions that I ask is… “What is the purpose of the appraisal?”
Because it’s important we figure out right away if they actually do need an appraisal AND if I am the right appraiser for this job.
I want to help them get the answers to their questions in a way that best serves their needs.
Our clients vary from homeowners who are getting a divorce, appealing their real estate taxes, looking to get their PMI removed….. to realtors who need an appraisal report to help them determine a list price for a unique home…. to lenders who are financing a mortgage.
Whatever the reason, the condition of the property is very important.
And, the best way to know how much the condition of your house impacts your home value is to to have a real estate appraiser come inside, gather pertinent information, measure your house and analyze the data.
Determining quality, condition and accurate square footage, and how the market reacts to it, is NOT something that a computer generated home price estimator can do.
There is a reason why Zillow lost $881 million dollars. …So, a computer generated home value report is not something I would rely upon for accuracy.
BEWARE: There is Something Sneaky Going On
Does the appraiser always determine the condition?
Short answer is Yes – at least it should be yes.
But…… there is something sneaky going on you should know about….
Some lenders will send out a “data collector” to measure your house and gather information about the condition of your home, which is then used to determine market value.
A “data collector” is NOT an appraiser. They do not have the education or experience that an Appraiser or a Trainee Appraiser is required to have to be licensed / certified in our field.
Because the “data collector” does not possess the higher level expertise the measurements, quality and condition ratings of your home may not be reported correctly.
As a result, the appraisal report may be based upon information that is not reliable.
Which means the home value is not credible.
Why is this happening?
Here’s why in a nutshell:
The lender is cutting costs by sending out a data collector instead of an appraiser.
Are those savings being passed along to you? I highly doubt it.
Are all lenders sending data collectors? NOPE
Want to get what you are paying for?
Want to make sure the condition of you house is reported correctly?
Keep reading……..
If this doesn’t concern you, then consider this….
The barrier to entry to become a “data collector” is extremely low (and so are their wages). And more importantly, there are zero regulations so, pretty much anyone can become a “data collector”.
So who, exactly are you allowing into your house?
Who are you allowing to take photos of every single room of your home?
In the state of Pennsylvania it takes approximately 5 years to become a certified appraiser. We are registered with the state and we are heavily regulated.
How to make sure the person coming inside your home is an appraiser:
When setting the appointment be sure to ask: “Who will be inspecting my house?” Ask them for their state license number and look it up.
If they are not registered with the state of Pennsylvania as an appraiser or appraiser trainee then, they are a data collector.
It’s super easy and takes about 20 seconds to verify.
For example, you can go search my license number right now:
- Tap here for Pennsylvania State License search.
- In the field titled “License Number” enter RL139474.
- Leave all the other fields blank. (Do not search by name)
- Tap Enter. Scroll down. You will see my info, license type, status Active.
- That’s it – you have verified the person coming to your house is either an Appraiser or Appraiser Trainee.
This post is all about how and when condition ratings affect home value.
