"Understanding Home Appraisals - Nashville"

In a hot market like Nashville, it isn't unusual to have properties selling for over asking price in a matter of days. This can be frustrating for everyone and first time home buyers in particular can find the process disheartening. The sheer volume of buyers, and the extremely tight supply we have been dealing with in recent years, makes finding the perfect home not only difficult, but in some cases impossible!

Fear not though, eventually you will find a home that works for you and your bid will be accepted. As frustrating as it can be trying to get a home under contract, it will eventually happen. However, now that you have found the right home for you, you will have another struggle to overcome: the appraisal.

The appraisal process isn't all that difficult (not compared to finding a home). The problem occurs when the appraiser undervalues your home. If the value of the appraisal comes back as less than your contract price, the bank won't approve your loan and you might just find yourself back to square one. Knowing that so many families in Nashville are having this problem, I though it might be useful to review the basics of an appraisal so that you know what to look for before placing a home under contract.

Appraisers use three basic methods for determining the value of a property. Those methods are called the cost, income, or sales comparison approaches. While all three might contribute to determining the value, the sales comparison approach is the most heavily relied upon method for determining value in single family residences.

Before we look at the sales comparison approach, it might be helpful to review the other two methods. The income approach is most commonly used to value rental properties for investors. It values a property based upon the income that the property produces. Single family homes which are owned by investors and rented to tenants can be valued using this approach and chances are some of the houses in your neighborhood are rented. An appraiser can determine what your home would rent for and use that information to determine the value of your home to an investor.

The cost approach is similar to the income approach in that it can help the appraiser get a rough idea of your home's value, but it isn't the preferred method for valuing single family homes. It considers what it would cost to replace your property if it was rebuilt today and then adjusts for depreciation which has occurred over the years. This method of valuation is often used for unique properties like a bank or restaurant.

The approach most often used in single family properties is the sales comparison approach. Your probably familiar with this technique even if you don't realize it. Whenever the Property Brothers or Chip and Joanna talk about "the comps" they found in the neighborhood, they are performing a basic sales comparison.

"Comps" is simply the term used to refer to similar properties to your home. In the retail single family housing market the value of a property (from the banks point of view) is determined by looking at what similar "comparable" properties sold for on the open market. Each individual home may be worth more or less to you personally, but an appraiser's job is to determine what the value of the home is to the average buyer because the bank wants to know what they can sell the property for if you skip town and move to Jamaica! With that in mind, just remember that a comparable property is one that is competitive to the property being appraised and that recently sold through a normal bidding process.

The first thing that an appraiser will look for in determining if a property is competitive is its location. A three bedroom two bath house in Berry Hill might look exactly identical to one in Green Hills, but it isn't ideally competitive. The best comps come from the same neighborhood and preferably the same street!

Once the appraiser finds homes near your property they will turn to the physical characteristics of both your property and the competition. What is the land size, shape and location? Are there any garages, porches, or unfinished areas? What is the age of the home and in what condition is it? Does it have a poor or desirable view? Has there been any recent updates to the house? Is there any deferred maintenance?

Using this information the appraiser will build a profile of your home and all the competitive homes she can find. Adjustments will then be made in the sales price based on if the property is better or worse than yours in order to reach a value. This value is basically an educated guess, but it will also serve as the maximum which the bank will loan you on the property. If your offer price is above the appraised price, you have a problem.

The best rule of thumb to use Nashville is don't buy the most expensive house on the block. Websites such as Zillow.com will help you find the recent sales of neighboring properties and as long as your home isn't an outlier, there shouldn't be any problem.

Good luck and happy house hunting!

Casey Ryan Richards
Nashville, TN
April 5th, 2018