This is a guest post from Liz Freeman, who writes about mortgage and finance issues. Freeman is the spokesperson for, an online tool for finding the lowest mortgage rates since 2000.

“If I’m willing to pay X for the home, it must be worth X, right?” There’s a lot of truth to that statement. Most accountants will tell you that the proper value of anything is either the lower of what it cost to acquire it, or what someone is willing to pay for it.

But a lender has to look at things differently. You may think that adorable hot pink house next to the off ramp, the strip club, and the convenience store is perfection and a steal at the price, but your lender wants to be sure that the property (AKA, the collateral) could be sold for enough to repay the loan if you default.

There Goes the Neighborhood — and Your Home Value
Lenders learned the hard way that they don’t just have to worry about the present. They have to consider the future when deciding how much to lend against a property. And what’s happening to homes in your neighborhood affects your value — if sales prices are down, your value drops too — even if your home is the gem of the street and perfect in every way.

Today’s appraiser has to fill out a “market conditions addendum” in addition to the regular appraisal. It includes an exhaustive analysis of housing values and trends where the property is. If your neighbors (yes, the ones with the 50-foot boat, the motor home, and big screen TVs in every room) blow off their mortgages and the street is littered with foreclosure sale signs, you are out of luck. Your neighborhood will be tagged with the label “declining.” Not only does this create problems for you, the seller, but it also makes things difficult for a potential buyer. The best mortgage rates out there may not be available, and a higher-than-usual down payment may be required.


Okay, But What About Your Home?
The appraiser looks for recently sold homes that are comparable to yours — with similar square-footage, grade of construction, views, and features. These are referred to as “comps.”

The appraiser takes pictures of the comps as well as of your home. Then, he or she calculates your home’s value and creates that complicated report. Several things might alter your value — for example, you live in a tract and everyone pretty much has the same floor plan. But your property overlooks a golf course (free landscaping, yay!) while your neighbor across the street has a view of that hot pink house, the strip club, and the convenience store. You get a higher value because your view makes your home worth more.

Improvements Are Nice…
Certain home improvements deliver more bang for your buck. Renovating an outdated kitchen, adding a bathroom when one isn’t enough, or re-doing old siding can increase your appraised value and pay big dividends when selling or borrowing against your home.

…But Don’t Overdo It
Turning your home into the envy of the neighborhood — a park-like garden, meditation pool, imported stonework, and commercial appliances may add value if you live in mansion territory. If you reside in a working-class area and go nuts with the additions, you won’t get extra credit. Appraisers refer to this as “over-improving for the area,” and your extravagance will not be rewarded.

So, What’s it Worth?
Your home will be valued two ways. The first calculation, found in the upper left-hand corner of page two, is its estimated cost including the value of the lot, the improvements to the property, and minus any depreciation. However, while this might be important when insuring your home, it’s the number at the bottom of the page that matters to a lender — the market value of the home, which is a better indicator of what could be recovered if you default on your mortgage.

Can the Appraiser Be Wrong?
You bet! Appraisers, like those in all professions, range from the highly trained and motivated to the sloppy and ignorant. And what you get depends largely on luck. Today’s Home Valuation Code of Conduct (HVCC) requires that appraisers are engaged by appraisal management companies that have no relationship to anyone who stands to gain financially from the transaction. While this can protect homeowners and lenders from unscrupulous valuation, it also means the appraiser has no incentive to do a good job. And sometimes an appraiser located hundreds of miles away will be asked to appraise your home and that could easily cause your property to be valued incorrectly.

If you feel that your home received unfair treatment, request a second appraisal (but be prepared to pay for it). You may want to try another lender — a different appraisal management company may well turn in a higher value. And if the house is hot pink, consider repainting.

Photo by John the Scone.