How do appraisal values increase?

[Kennedy]

When buying property with a loan, the lender requires an appraisal. If the appraiser looks at what comparable homes in the area have sold for, how do the appraised values ever increase? In other words, if the appraiser is using the house across the street as a comp and it sold last month for $300,000 (same square footage, same finishings, same lot size), how could my home ever be appraised for more?

And if the only comp in the area sold 4 months ago for $300,000, how could my home appraise for more? It doesn't sound like the appraiser considers inflation or anything else.

So...unless a buyer is purchasing for cash for over what the appraised value would have been, how do comps ever increase?

[02nz]

When buying property with a loan, the lender requires an appraisal. If the appraiser looks at what comparable homes in the area have sold for, how do the appraised values ever increase? In other words, if the appraiser is using the house across the street as a comp and it sold last month for $300,000 (same square footage, same finishings, same lot size), how could my home ever be appraised for more?

And if the only comp in the area sold 4 months ago for $300,000, how could my home appraise for more? It doesn't sound like the appraiser considers inflation or anything else.

So...unless a buyer is purchasing for cash for over what the appraised value would have been, how do comps ever increase?

I don't think there's a simple answer, as appraisals are a mix of the objective and subjective, and so no two appraisers will come to the exact same value. I think at least some do consider market dynamics, e.g., if an area has rising values over those 4 months, some appraisers probably account for that, but again, not all appraisers are equally familiar with an area or consider these dynamics the same way. But generally this shouldn't make a huge difference, esp. if we're talking about just a few months.

Also, appraisals are almost never based on one comp. Yes your home is very special , but unless it's the Hearst Mansion, there are many that are comparable. The comps don't even have to be all that similar to yours; appraisers make adjustments for things like more bedrooms or other differences, whether desirable or undesirable. Other properties currently on the market (and how long they've been on the market) are also factored into appraisals. If a comparable property has sat for 2 months, for example, your property is not likely to appraise for that price.

[adamthesmythe]

Usually the increase is slow enough to be within the margin of error. In an area with rapidly increasing prices appraisals can be a real problem for buyers. At least as far as mortgages are concerned, if you have a good-sized down payment a somewhat low appraisal is not a problem.

[RocketShipTech]

It sounds like you don’t live in a hot real estate market.

In a hot market buyers are willing to bid against each other and pay more than the appraised amount, bringing cash to the table to make up the difference. And that’s how a higher appraisal target is set.

[delamer]

If the house across the street is identical to yours and sold just last month, why would you expect yours to sell for more?

[BillyK]

Appraisal reflect market conditions. Appraisers will perform a market analysis and perform time adjustments if necessary. For example - If market conditions reflect a yearly 6% upward market adjustment for price increases, the appraiser will make a +2% upward market condition adjustment to the comparable sale that sold 4 months previously to reflect current market conditions.

[sp0704]

I'm a commercial appraiser. Appraising can be like looking in the rear-view mirror, as today's values (based on contract price) may be slightly higher than the most recent closed sales indicate. What drives this in a good market? Supply and demand. Listing agents will continue to push the bar a little higher with their listings, with many markets having bidding wars for properties. You bet values are increasing in these markets. Essentially, the appraiser will consider properties under contract, the most recent sales in the neighborhood/area, review the market and transaction statistics (what does the average sale price year-over-year show?), and talk to brokers to gauge increases in the market and where values are currently. Typically, values will increase 2% to 3% annually, but can be much higher in some instances, or maybe declining, which we may start seeing in some markets soon. As indicated above, a market conditions adjustment is applied to the comparables to bring them to a current market value.

[Kennedy]

Usually the increase is slow enough to be within the margin of error. In an area with rapidly increasing prices appraisals can be a real problem for buyers. At least as far as mortgages are concerned, if you have a good-sized down payment a somewhat low appraisal is not a problem.

What do you mean by this, please?

[mervinj7]

Usually the increase is slow enough to be within the margin of error. In an area with rapidly increasing prices appraisals can be a real problem for buyers. At least as far as mortgages are concerned, if you have a good-sized down payment a somewhat low appraisal is not a problem.

What do you mean by this, please?

Let's say you want to offer $500k for a house. However, it only gets appraised for $450k. The bank is willing to give you a loan for 80% LTV or 80%*$450k=$360k. So now, your down payment is $140k instead of $100k (20% of $500k). Thus, a larger down payment buys you some wiggle room on the appraisal.

[jabberwockOG]

At a basic level an appraisal takes recent neighborhood comps of similar homes, and then adjusts for deltas in home square footage and lot size. You can always appeal any appraisal you do not agree with - it is somewhat subjective so there is almost always ways to argue for some adjustment.

[drk]

What do you mean by this, please?

People typically offer 20% down as a floor, not a ceiling. In an increasing market, strong buyers can respond to a low appraisal by either increasing their LTV or increasing their downpayment. If they don’t, the seller can move onto the next bidder.