If I go the grocery
store and buy an apple, I know that it’s going to cost somewhere between 75
cents and a dollar. It’s pretty easy to
determine value, because I can just compare what King Soopers is charging
versus what Safeway is charging for the same variety, and make a decision from there.
Generally
speaking, apples are apples.
Valuing a house
is a lot more complicated. There are many variables that go into determining the value of a home. Condition, location, amenities, schools,
proximity to shopping, access to roads and public transit, neighboring
re-development… there are countless components that go into the overall
value proposition found in a home.
These days,
with home prices skyrocketing in Denver, appraisals have become a real issue. With lower-priced homes especially, somewhere
between 25% and 33% of all financed deals are hitting snags on the appraisal,
mostly because appraisers look backwards (at past sales) while buyers are
simply trying to outbid the masses to get a home under contract before prices
go up even further.
Which leads
to a question… how accurate is an appraisal, and does an appraisal really
determine what your home is worth?
I meet with appraisers
regularly, as I don’t leave things to chance and strive to engage appraisers
personally on each and every one of my listings. If you have properly marketed a home and have
multiple offers, you can pretty much bet the appraisal is going to be a
challenge.
So showing up
with a list of improvements and upgrades, hand-selected comps and (hopefully) a
stack of competing offers goes a long way toward getting a home to appraise at the contract price.
But does an
appraisal determine value?
Appraisals
serve an important role, which is (mostly) protecting the lender’s interest in
a transaction. No lender wants to loan
$400,000 on a $375,000 home. That’s bad
business.
While the
buyer pays for the appraisal, in my opinion that appraisal is mostly for the
benefit of the bank. The buyer’s agent
ought to be the one looking out for the buyer.
The appraisal serves as a backstop to make sure there is some basis for
the contract price, but if a low appraisal is news to the buyer’s agent,
chances are that agent is either clueless or not looking out for the buyer’s
interest.
Now let me
tell you where the appraisal process comes off the tracks.
I had a
client reach out this week who purchased a starter home for $212,000 back in
March. She knows the market is hot, because
we talk regularly, and she knows that interest rates have dipped again. Therefore, she wanted to know if there was
any chance of refinancing with a 20% equity position, which would allow her to
drop her mortgage insurance and significantly lower her monthly payment.
Now I follow
her neighborhood closely and I know exactly what I would do if I was listing
her home today. I would have no
hesitation putting her home on the market at $235,000 to $240,000, because I
believe buyer demand is so strong (and her home would show so well) that she would
get it.
But an
appraiser is going to see things very differently, because the only two model
matches to hers which have sold since March were a trashed out HUD home (for
$199,000) and a marginally-updated resale (for $223,000).
Both of these homes needed work, but as comps, there they sit,
gumming up the works.
If an
appraiser is simply asked to do an appraisal, without the compensating factor
of three or four offers in hand in the high 230s (or even 240s), the appraiser is
going to default to using these two comps.
Sure, he or she will make some basic adjustment for condition, which may
add $10,000 or $15,000 of value, but could an appraiser take closed sales of
$199,000 and $223,000 and get to $240,000?
Highly unlikely.
Truth is, the more reliable indicator for what your home is worth in today's market is determined by what a ready, willing and able buyer will pay for it. And that may be very different than the value an appraiser comes up with, if that appraiser has nothing else to go on but past sales.
That’s why
hiring a strong listing agent is so incredibly important. Leave that appraisal to chance, and you may
get a random outcome. But show up with
four offers in hand, a list of improvements, interior pictures of the discredited model matches, a list of area homes that have
similarities (and have sold at higher prices) and a copy of your resume, showing
that you are closing a large number of deals and that you have been doing this
for 20 years… and you very often will get the benefit of the doubt, and the higher price for your seller.
Pricing a
home to get top dollar is an art.
Appraising a home is much more of a science. There is an inherent conflict between the
two, and it’s the listing agent’s job to bridge the divide.
For my past
client, I don’t think her home is quite ready to appraise at a high enough number to drop her mortgage insurance. But could she sell
it at a price that's 12-15% above what she paid for it nine months ago? That’s a different
question, because in this market, properly staged and marketed, I believe she could.