Appraisals: Types of Home Valuations

May Cover

Happy May! Hope you are enjoying the remaining days of Spring.

We will continue on the topic of real estate appraisals from last month:

PART II

When a real estate agent performs home valuations, there are usually 2 different scenarios:  (1) Buyer CMA.  This is when a buyer sees a home and wants to know if the listing price is low, fair, or too high.  A Buyer’s Agent will look at what similar homes have sold for in the neighborhood to answer that question.  (2) A seller wants to know what his home will sell for.  That, I believe, is the most difficult and skill-based of all home valuations, because it is a forward looking statement.  It is essentially a forecast, a prediction.  It’s a “crystal ball” expectation.  A stock analyst can tell you how a stock has performed in the past.  But to predict how a stock will perform in the future is clearly the more difficult task.  To predict what a home will fetch in any given market combines “art and science”.  It contains both objective components and subjective assumptions.  The experience and skill of the agent and the quality and accuracy of that prediction is a factor that contributes to a home that sells fast and high, or lingers on the market for months or even years and eventually expires or sells for lower than market price.

I have high respect for appraisers.  Their training and expertise related to home valuations is vastly superior to an average agent.   Our function and approach differ in that:

(1) When I perform home valuations, my customer is the seller.  My objective is determining the “market price” of a particular home. By “market price”, I mean the price a home can achieve in an open market, in an arms-length transaction.  This incorporates an intimate understanding of buyer behavior as well.

(2) In a mortgage appraisal, the appraiser’s customer is the bank.  He determines “collateral value” of a home based on a complex list of ever changing rules set by the lending industry.  A mortgage appraisal is reviewed and scrutinized by underwriters before it’s accepted by the bank.  Rules and guidelines are strictly followed.  An underwriter often challenges an appraisal report and the appraiser has to justify and defend his work.

In the majority of cases, my work and that of an appraiser concur. I list a home at my projected market price, we achieve contract at or near that price, and the subsequent appraisal supports the value. Transaction closes smoothly and successfully.

However, sometimes the appraisal comes back below the contract price.  The reasons are case-by-case, but based on what I wrote in 1 and 2 above, there are simply divergent viewpoints that are hard to reconcile.  For example, would you pay more for a home that has a brand new roof and A/C system, so you wouldn’t have to worry about them in the next 15 years?  Would you pay more for a home whose kitchen is equipped with gorgeous top-of-the-line Viking or Thermador appliances?  I know I would.  Those things have value to me as a buyer.  However, you will not see them in an appraisal.  Why not?  The bank rules say so.  In the next issue, I will talk about what happens when appraisals come back low.  Also, I will discuss how appraisals can sometimes be higher than market value!

Until then, take care!  See you next month!