Why Two Similar Homes Can Receive Different Appraisal Values
For homeowners, it’s a logical assumption. For realtors, it’s the ultimate real estate paradox: two homes on the same street, built with the same layout and square footage, yet they yield completely different appraisal values.
True value goes beyond the surface-level comps. Here’s a breakdown of why:
Effective Age vs Actual Home Age
Actual age is the chronological age from the date that the house was built. Effective age is based on a house’s current physical condition and maintenance. This can include upgrades like renovations, updates, replacement of wiring, plumbing, or HVAC units, new roofing or siding, and consistent home upkeep.
Positive Views vs Negative Views
Location is everything.
Homes can have a positive view, with privacy, water, elevation, or proximity to amenities, schools, and employment.
Negative views, such as proximity to a multi-lane road, train tracks, highways, or an industrial zone, can substantially impact the price of a home. Additionally, living next to a noisy or messy neighbor can negatively impact the value of a home.
Appraisers also factor in elements such as traffic patterns and the orientation of the house. Is the house in a flood zone that requires higher insurance? Does one side of the yard get a lot of foot traffic? Is it difficult to drive to the house? These factors all determine how competitive a house is within the real estate market.
The Role of Market Timing and Comparable Sales (Comps)
Appraisers analyze homes through the Sales Comparison Approach, which helps calculate value by looking at the actual prices buyers just paid for similar houses nearby. It operates under the theory that a buyer will not pay more for a house if they can buy a matching house down the street for less money (principle of substitution).
However, a true comparable sale must meet strict criteria:
- Proximity: Within market boundaries.
- Similarity: Closely matches the house in square footage, room count, style, & overall condition
- Recent Sale: Must have closed recently, ideally within the last 3-6 months
Since no two houses are identical, an appraiser typically puts 3 to 6 comps into an adjustment grid. If the comp is superior to the client’s house, the appraiser subtracts value from the comp’s sale price, and vice versa. But comps only demonstrate what a home was worth.
Shifting Markets for Similar Homes
Real estate markets are constantly shifting due to supply and demand, interest rates, inventory and other micro/macro economic activity.
In a market that is moving, lending institutions require appraisers to apply a Market Condition Adjustment (or Time Adjustment). This enables the appraiser to update an outdated comp by applying supported adjustments to the comp to represent the cash equivalency of today’s standard.
Appraisers must then justify the adjustment through a statistical analysis, market trend analysis, regression analysis, and other supported methods. Time adjustments should be calculated from the time of escrow of the comparable sale to the effective date of the appraisal.
How This Affects Realtors
Being able to explain these concepts will help educate sellers on why similar homes down the street may have sold for a different price, helping to avoid frustration and build trust early on in the listing process. By knowing how an appraiser will adjust a house’s value, realtors can more precisely anticipate what lenders will approve. This expertise keeps the transaction moving smoothly toward a successful closing.
How This Affects Homeowners
As a homeowner, knowing the factors that go into a home valuation can help manage expectations. When selling, anticipate how potential buyers and their appraisers will perceive the location of a house, so that the benefits of a specific property can be highlighted to offset any potential drawbacks. Move the conversation away from emotional attachment and toward understanding your property’s position within the current, evolving market.