How appraisers value homes in a hot housing market

Robin Sheridan, a real-estate broker with Compass Washington, recently listed a three-bedroom home in Seattle for $795,000. The 76-year-old brick home had what Sheridan considered a “funky layout,” with two rooms added to the back that didn’t quite integrate into the flow of the home. Still, they functioned well as office spaces.

Sheridan received 29 offers on the property, which went pending within five days – and sold for $1.013 million, or 27.4% over the list price.

As anyone involved in the residential real-estate market knows, bidding wars – and contract prices exceeding the list price – are the norm today in many markets around the nation.

Sheridan’s listing appraised at the contract price, and the deal went through without a hitch. But how do appraisers value a home in a market where prices are escalating rapidly – and where nearly two-thirds (64%) of listed homes faced bidding wars in March, according to Redfin, due to low mortgage rates and a severe shortage of homes for sale?

“The challenge is that the sales data you’re looking at is dated,” said Shawn Telford, chief appraiser at CoreLogic. “While the comparable sale might have closed three months prior to the appraisal, it went under contract before that, and market conditions five months ago were different than they are today. That’s where appraisers put on their thinking caps and dig in and do their research on how they might adjust the comparable sale they’ve selected to account for current market conditions.”

Indeed, time adjustments are a valuable tool that appraisers use to reflect changing prices in the local housing market. “They might look at the last three to six months of sales activity – or longer – in a defined market and try to extrapolate what the trend is,” Telford said. “If home prices increased month over month by 1%, they can use that pattern to support an upward adjustment to the comparable to accurately reflect what the subject property might be doing.”