BIRCHMAX
TEAM



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How are home
values determined?

AVM is short for Automated Valuation Model. Companies like Zillow and Trulia offer these residential estimates free to the public. Investment professionals and lending institutions use AVM technology in their analysis of residential property. An AVM is a residential valuation report that can be obtained in a matter of seconds. It is a technology driven report. The product of an automated valuation technology comes from analysis of public record data and computer decision logic combined to provide a calculated estimate of a probable selling price or value of a residential property. These automated algorithms can be substantially prone to valuation errors.

 

PROS: AVMs increasingly used by mortgage lenders to determine what a property might be worth in order for them to lend against the valuation. The advantages of using AVMs over traditional chartered surveyors are that they save time, money and resources.

 

CONS: The disadvantages are that they do not take into account the property condition, (very important) or location of the property if near a desirable or undesirable area, i.e. lake or salvage facility or railroad tracks, etc.  

Since a physical inspection of the property does not occur and therefore the valuation produced assumes an average condition which may be incorrect or the view which is adjacent to the property and location.


New construction is particularly difficult to value due to the lack of comparable properties and historic data. Other data sources, i.e. local MLS (Multi Listing Service) are sometimes misleading due to concealed incentives in recorded sale price and date of sale.

When you apply for a mortgage, your lender typically requires the property to be appraised by one of their approved appraisers or thru a AMC, Appraisal Management Company. This practice helps create more consistent appraisals and also gives you and the financial insitution assurance that the value of the home is reflected in the market area. Even though the home appraisal is the lender's requirement, it's the borrower's responsibility. You usually pay for it as part of the mortgage costs at the time of closing. The cost is typically around $300-$500 but can be more depending on the price of the property or complexity. There are three primary appraisal methods for residential property. The Sales Comparison Approach, Cost Approach and the Income Approach.

 

In the Sales Comparison Approach, the appraiser compares the property with three or four similar homes that have sold in the area, often called comparables, or comps. The analysis considers specific components, such as lot size, square footage of finished and unfinished space, style and age of house, as well as other features such as garages and fireplaces.

The Cost Approach is used more for new property and is based on reproduction costs. The appraiser estimates the cost to replace the structure on the property if it were destroyed. The appraiser then looks at land value and depreciation to determine the property's worth.

The appraiser gathers information for the appraisal report from a number of sources, but the process often begins with a physical inspection of the property inside and out. Additionally, the appraiser may look at county courthouse records and recent reports from the local real estate multiple listing service. The Income Approach method allows appraiser or investors to estimate the value of the property based on the income produced. The income approach is computed by taking the net operating income of the rent collected and dividing it by the capitalization rate (the investor's rate of return). It is most typically used for income producing properties and the formula is:

Market Value= Net Operating Income
Capitalization Rate
Also called the "Income Capitalization Approach".

 

A common misunderstanding is that the appraisal amount is only for the house itself. In fact, the figure appraises the total value of the home and any other permanent structures, along with the land that the house is built on. This appraisal figure also determines the loan amount you can get to buy the property. Appraised values don’t always reflect market conditions such as rising prices, multi-bidding and/or low inventory.


THE BIRCHMAX TEAM offers both services to our clients, from "Comparable Assessment" to fee based "Appraisal Services".  Be assured whether we appraise, list your home or represent you as the buyer, your investment value is our expertise and highest priority. 

AVMs, Good or Bad?

Appraised Value Protects Buyer, Seller & Banker