Appraisal value of a property is one of the most prevalent reasons for an escrow to cancel and a seller to lose a deal, second to property inspections. Before a lender will loan you money to buy or refinance your home, the lender will attempt to determine what the property is worth. This is because the real estate serves as the collateral that you will be put up to secure the loan. Lenders will order an appraisal report and the value returned on this report will determine how much the lender is willing to lend.
In either a market that is moving upwards fast or downwards fast, appraisal values will be a challenge to the escrow process. Many times we find that the data of closed sales may not substantiate the current true value of a property, because the market is moving so quickly in either direction. As a listing agent, it is my job to determine the current market value based on the most recent sales, but yet also include the available inventory not yet sold. These properties not yet sold are considered the ER/EA- Available inventory, P- Pending sales, and C- Contingent sales.
By preparing a comprehensive market analysis “not yet sold” I can prepare the Seller to stay ahead of the curve either by pricing lower in a downward market or pricing higher if we are in an accelerating market. By doing this I am consulting my clients with what the true market value is and therefore the seller can make an informed decision on how to best price their property based on the REAL current market conditions. Appraisal value and Market Value are NOT necessarily the same value.
Ultimately the Buyers are who determine the current market value with the supply and demand of the real estate product. Motivated buyers in an upswing market can possibly offer more for a property above the appraised value to bid out other potential buyers. Last year’s market was a perfect example of how this Buyer demand increased the market value of real estate, yet the appraisals lagged behind.
Many buyers paid over appraisal value for property, thus raising the values and the appraisal values followed behind those market values. Now in the 2014 market, the appraisals are ahead of where the market is now, a slower and flatter market than in 2013.
Appraisal value is always important, but in my opinion, never more important that the Buyers demand in any market as the Buyers always dictate the value in the end. A property’s worth is what the Buyers are willing to pay for it. Below you will find an excellent summary of what an appraisal is and how it is used in the sale of residential real estate.
I recommend to any Homeowner that is interviewing Listing Agents to see what criteria they used to establish the current comps they used for a Market Analysis of their property. If they did not use and evaluate the Current Market Available inventory then they did not do a comprehensive market analysis and the seller should ask to have the comps include these currently available properties.
Basic home facts
The first page will have a number of headings that identify the subject property and any improvements that have been made to it. It’s important that this information be correct, as it helps the appraiser identify similar properties to which your property can be compared in order to determine its market value. If any information on the first page is inaccurate, call the mortgage company to report it.
The second page of the report is where you will find the actual number that lenders will use to base their decision upon. The first column is taken up by the subject property, and to its right are a number of comparable homes, often referred to as comps. The appraiser will attempt to list any comparable homes that have been sold recently. These homes will all be located very close to the subject property in an attempt to minimize the differences in value that can be expected between different neighborhoods.
Because every property is unique, making comparisons can be difficult and requires the appraiser to make adjustments to the comps’ sales prices to better estimate the market value of the subject property. Not all adjustments reduce the estimated market value of the subject property. If the best comps available are smaller homes, for instance, it could lead the appraiser to make a net positive adjustment to the estimated value on the report. All of the adjustments are then combined into a gross adjustment, which is used in the estimate but also serves as a gage of the confidence the lender should have in the final value. The higher the gross adjustment, the less reliable the report should be considered.
Estimated market value
At the bottom of the page, the appraiser will reveal the estimated market value of the home. This is the value lenders will use to determine how much money they will lend and is the basis for the loan-to-value ratio that is very important in the home finance process. In some cases, the appraiser will also provide a cost value, which tells the lender what it would cost to replace the home. This can be used as the basis for home insurance purchased to protect the homeowner and the lender over the course of the loan’s lifetime. Many other pages of information can be included with the report. These provide additional details on the subject or comparable properties.
Call us today if we can provide any additional information to assist you in your home search!