You may have read the title and thought…Huh? This is especially perplexing if you were in a multiple bid situation in which several potential ‘would be home buyers’ were vying for the same piece of property. Surely, you, your REALTOR, the other agents and their clients couldn’t all have been totally off base?
You’re probably asking…Doesn’t the market dictate what a home is worth?
ANSWER: Well, yes and no. Depends on which market you’re referencing and who you’re talking to. The issue of market value is a little more nuanced than the negotiated number that a Seller and Buyer may choose to agree upon as the price for the home.
If you are obtaining a mortgage for your home, the lender will order an appraisal on your behalf to ensure that the money they are loaning you is fully supported by the price you are paying for the home. In a time in which the industry is under tremendous scrutiny due to the sub-prime mortgage crisis that nearly plunged all of us into a financial abyss, this process is taken very seriously.
An appraiser will use comparable properties which successfully retailed/closed in the recent past to determine what your home is likely worth on the current open market. Under most circumstances, this process arrives at an accurate value. However, there are situations where the evaluation may be compromised. Here are a few to be aware of.
1. Transitioning Market.
You happen to be in a ‘Transitioning Market’; one in which values have recently increased significantly and/or rapidly. However the past data does not support this trend yet. In West Michigan, this is currently a challenge. Many neighborhoods are seeing steady gains in prices but there have not been enough sales to fully document the trend. Eventually, the stats will catch up, but in the meantime, you may also want to double check the opinion of the appraiser by reading reason #2.
2. The appraiser may not be familiar with the area.
This does not necessarily mean they are incompetent. It may simply mean that a nuance in the local environment may be obscured to an appraiser who does not routinely conduct appraisals in the vicinity. In situations like this, your REALTOR may be able to provide the lender with additional comparable properties for consideration or you can ask for an Appraisal Review in which the original appraisal is double checked to ensure its accuracy.
If you find that you are told that you paid more for the home, you can use the appraisal, if it is correct to make an argument for negotiating a lower sales price based on what the lender will support in the loan value. If a Seller is unwilling to lower the price of the home, you will have to fork up the difference in the sales price and what the lender is willing to loan if you determine that you would like to move forward with the purchase.
Having an accurate assessment of value is critically important. Paying more than a home is worth eats up your equity. But, under-paying can also have an unintended consequence of artificially lowering the value of the community in which you are now vested.
Recommended Reading: Passing the Baton…Why a Home Closing Can Be a Beautiful Thing
*This is a series. Check back for future updates.