In a twist on the “love it or list it” approach of the popular HGTV show, many Atlantans are currently facing a decision between renovating their current home or relocating to a new home. I’ve previously discussed in this place the phenomenon of the hugely active housing market, with a record number of sales occurring and prices soaring. We’ve had one of the most active years in recent memory, and Atlanta home prices have increased almost twenty percent in many neighborhoods as compared to prices pre-pandemic.

Partially fueling this immense activity is the fact that many people were sitting at home, stuck in place, for months during the pandemic and had time to look about at their four walls and think about where they might prefer to live. Homes began to feel very cramped all of the sudden with parents working from home and children attending virtual school in their rooms.

Naturally, owners begin thinking about more space, and moving out of town didn’t seem as daunting a prospect when there was not a commute to consider (many workers will work from home permanently, and many others will go into the office less often than they did pre-pandemic).

But not everyone who wants more space or different space actually wants to MOVE, with all that a move entails. Some who love their neighborhood or other aspects of their current home are simply deciding to renovate or expand what they currently have. I’ve been approached by many clients who are deciding whether to stay or go. If that’s you, we are thrilled to meet with you and discuss the options and possibilities.

If you know you want to stay in place and renovate or expand your current abode, here are some tips and ideas:

• Keep in mind that since many people are deciding to make a change, contractors are charging more than before and materials and supplies are more costly. You’re going to spend more renovating now than you typically would because so many people are making that decision currently.
• Generally speaking, if possible, you want to keep the same number of bedrooms and baths in your home to the extent possible. While sometimes it may seem advantageous to combine two bathrooms, appraisals are in large extent dependent upon the number of beds and baths in your home so keeping the baths separate while improving them both might be the answer.
• That said, you are renovating your home for YOUR purposes and comfort. It isn’t always all about resale. So if you have two small baths and want to renovate them into one large bath because you don’t need the two smaller baths, by all means do so.  Because the other side of that coin is that when you DO go to sell your buyer may prefer the larger bath as well.
•  If your renovation plans can include improving upon outdoor space, in particular if you can provide outdoor space that is covered, this is at a high premium and that is unlikely to change anytime in the near future. People during the pandemic became more accustomed to being outside and therefore more are looking for homes that have outdoor spaces that are comfortable and usable in all types of weather.
• Along the same lines, homes with pools have become much more valuable than they were before. While previously, pools could sometimes be a neutral factor (i.e., they may or may not add value in a particular home) these days pools add a lot of value. Again, I attribute this to the fact that more people are staying at home and entertaining outside. But of course I don’t recommend you put in a pool if you don’t really want one personally, however, because like other types of renovation and construction, you’ll find you’ll spend a lot more now than you would otherwise given the demand for construction at this time.

Given the cost of renovation and addition, and the hassle to you and your family, t’s definitely worthwhile to consider what it would entail for you to sell your current home and purchase a home that’s already done in the style or manner or is of the size that you want. Living through renovation is a lot more difficult than most people realize, and could take a lot more time than you think. We are always happy to consult with you and give advice as to what you could sell your current home for, and what you could afford to move to should you decide to sell and move rather than renovate. Please give us a call!

“Appraise” and “praise.” These words have common linguistic roots and both deal with perceived “value”. However, there is not much praise for appraisals when they scuttle your real estate deal. This has happened a lot in Atlanta lately, so much so that word that the buyer’s appraiser is coming to visit can strike fear in the heart of even the most confident home seller. But the more you know about appraisals and how they work, the better off you are (and the less you have to fear) as a buyer or as a seller.
In 2008 the real estate market crashed. Hard. Then it started recovering – until in 2015 Atlanta home prices were up to about the same levels they were before the crash. While the real estate market has gone up and down since then, as it always does, we have had a continuing problem with appraisals ever since the 2008 crash. This is understandable, since part of the cause of the 2008 crash was artificially high appraisals. Prior to 2008, real estate prices rose rapidly and appraisals rose right there with them, fueling the real estate frenzy. Then the mortgage meltdown and the resulting fall. After the market crash, banks looked much more closely at appraisals and at the appraisers that the banks were hiring for valuations. Lenders, now burned, gave the mandate that appraisals should be much more conservative than they had been in the past. Appraisers who over appraised no longer received work from the lending industry.

In addition to the tightening of the appraisal industry due to the crash, there is also the problem that in a rising market there is a natural issue with appraisals, and here is why. An appraisal looks at past sales as an indicator of what a property is worth today; appraisals are backward-looking. So if I have a property under contract today, my appraiser for the deal is looking back at sales that occurred in the past, and will base the appraised value on homes that sold at a time when the market was lower than it is today. You see the problem. This “look back” to a time when values were lower serves as a natural governor that prevents prices from rising, or at least from rising very rapidly, but can cause a problem even if the current deal is a fair one, if the homes that sold recently don’t support the current price.

In fact, the definition of “fair market value” is this: fair market value is what a reasonable purchaser acting in their own best interest is willing to pay, and what a reasonable seller acting in their own best interest is willing to accept. So by definition a contract at a certain price, entered into by reasonable parties acting in their own best interests, should be evidence of fair market value. And that’s why in real estate transactions you often see appraisals coming in exactly at contract price – not above and not below. But when the market is rising, appraisers can have difficulty finding sales to support the contract price, even when that contract price is fair.
Let’s take a closer look at how an appraiser comes to determine value in a home purchase transaction. (An appraisal might also be ordered for a refinancing or to value a property when the mutual owners are splitting up, but for these purposes we are considering appraisals in the context of a real estate deal.) When there’s a real estate contract to purchase property and the purchaser applies for a mortgage loan for the purchase, the appraiser’s job is to determine if the property supports the price agreed upon in the contract. The uniform appraisal standards, which appraisers must follow, require that the appraiser pull comparable properties (”comps”) that have sold in close proximity to the home being appraised. The appraiser will typically start with homes within a one mile radius of the property being appraised that have similar size and with similar features and that have sold within the past three months. If there are not a sufficient number of comps three months old, the appraiser can back in time further but generally cannot go back more than twelve months. The appraiser can also go out farther geographically if necessary. The appraiser compares the square footage and features of these “comp” homes with the home that is being appraised. If there are good comps that are close in geography and time, the appraiser must use them first. Then the appraiser must use these facts and numbers to come to the right value for the house being appraised. There is some, but not a lot, of subjectivity in the process; the objective standards are designed to lend stability and uniformity to the process.

So given that, consider this: more information results in a better ultimate decision. So the more information the appraiser has, the more accurate the appraisal will be. That is why the buyer, seller, and agent who have superior information can help an appraiser in the task of valuing the home. And it is most likely the agent who will have helpful information. What caused a home (a potential comp) that sold low to sell low? Perhaps the agent knows that the basement flooded, that it was a stigmatized property in some way, that the kitchen while listed as renovated was not in fact renovated. Information that the appraiser may not know can be helpful. Agents have often visited many of the homes that previously sold while the appraiser likely has not, and so can offer information that is not part of the public record. The buyer who has looked at other homes that have since sold can offer information about those homes: were they superior (or inferior) in some way that may not be evident to the appraiser (who has probably not visited those homes)? A seller might supply accurate square footage to the appraiser if the information in the tax records is not correct. Most appraisers welcome additional information, whether or not it is factored into the final report. (Note that the information should be filtered through the agent – the parties should not themselves approach the appraiser. And the agent should offer, but not insist, that the appraiser consider the information).

In the end, the appraisal must be unbiased and the result of the appraiser’s own research. The parties have (and should have) little influence over the appraisal, and in the end the parties’ only recourse for an appraisal they disagree with is to contest the appraisal or ask for another appraisal. Still, knowing how the process works – and how decision making works – can help the agents and parties be a valuable part of the appraisal process.

Note, too, that appraisals are pertinent in other stages of the transaction, not only at the contract phase. For instance, when an agent first meets with a seller, the agent should tell the seller about the appraisal process and potential problems involved. You may think your home is worth a million dollars, but if it will only appraise for $800,000 you likely are not going to be able to sell it for a million. One potential safeguard is to order a pre-listing appraisal. While we real estate agents view, price and sell property every day and know what the market will bear, it can be helpful to have a professional appraiser apply the appraisal standards to determine what price is possible to defend. I find it most helpful to ask the pre-listing appraiser to give us the largest number that would be supported by the guidelines particularly in a rising market. That way we know the upper outside amount we are going to be able to support, even if we decide to list at a lower number after taking other factors into account.

Know that while a pre-listing appraisal can be helpful, after contract the buyer’s lender will order their own appraisal and will never agree to rely on the seller’s appraisal, which the lender views as potentially biased. After contract, if the appraisal is below contract price the buyer will quite reasonably argue that if the seller does not agree to a price reduction and the buyer walks, the seller may have the same problem with the next buyer or, even worse, the next appraisal may be even lower.

In recent years we have had a rapidly accelerating market and in some areas of town hot properties with multiple offers would even get contracts removing or limiting the appraisal contingency through a special stipulation to the contract, typically worded something like this: “if the property fails to appraise for full contract price, the buyer agrees to pay up to $10,000 above the appraised price to meet the contract price, but under no circumstances will the buyer be obligated to pay above the contract price.”
These removals of appraisal contingencies are much less common in the current market, when prices are stabilizing and there are fewer buyers out there vying for available properties. For both buyers and sellers, understanding how appraisals work can help all parties feel comfortable with the deal that is ultimately struck.