Tag: appraisal

Appraisers may have to make some minor personal judgments when examining a property’s potential value, but they have less leeway than you may think. There are several factors that an appraiser must take into consideration. It’s important to realize that an appraiser’s job is to report a property’s value, not determine it. The factors that an appraiser looks for include those related to the property itself in addition to the surrounding environment.

The property’s individual characteristics are called elements of value, and they can be remembered using the acronym DUST. They are demand, utility, scarcity, and transferability. Demand is the same for an appraiser as it is for anyone else — the number of buyers who may be interested in the property. Utility looks at all of the property’s potential uses. Scarcity is similar to supply, but is specific to properties similar to the one in question. Transferability relates more to the seller than the property itself, and simply asks whether the seller is legally able to transfer the property.

The environmental factors include physical, economic, government, and social considerations, or PEGS. Physical considerations are the property’s proximity to various resources, such as public transportation or amenities, and even natural resources. Economic factors include data such as rents, vacancies, and homeownership rates, as well as employment opportunities. Among the government considerations are property taxes, zoning and building codes, and local government services. The social aspects are such things as crime rates, school ratings, and recreation.

Photo by Tierra Mallorca on Unsplash

We’ve mentioned several times already how cutthroat the competition is in the current housing market, and how this is raising already high prices. The effect on people across the industry — such as buyers, sellers, lenders and real estate agents — is apparent. One group that you wouldn’t think would be strongly affected is appraisers, since their pay isn’t affected by home prices. In reality, they are beginning to struggle. Not only do they have much higher demand when the market is hot, but it actually makes their job much more difficult.

Appraisers are often using values of recently sold homes as a point of comparison. While this is not the only tool appraisers have at their disposal, it’s a major one, and its efficacy is called into question in the current market. Houses are selling very quickly, and prices are rising rapidly. Adjusting the formulas to account for a sudden burst of competition isn’t easy. In addition, an appraiser’s job isn’t to predict the future. Even if we can see that the market is unstable, or heading in a particular direction quickly, an appraiser reports the current value of a property, not what its value may or may not be in the near future. These factors all result in undervaluation of properties, which we can see sellers or their agents are also doing as many properties are selling well over the asking price.

Photo by Júnior Ferreira on Unsplash

More: https://journal.firsttuesday.us/appraisers-struggle-to-keep-up-with-2021s-hot-market/77767/