A Market Analysis     


      Setting the right price is an important first step in getting a home sold. Home sellers often wonder if they should spend $200 to $400 for a professional appraisal of their property before placing it on the market.
      A professional appraiser's opinion of a property's market value is based on the recent sales of similar homes. Different appraisers could come up with different numbers. Even if all of them agreed on a value, there is no guarantee that you would receive that amount for your property. An alternative to a professional appraisal is to ask a professional Realtor for a written market analysis of your property. This analysis will include information about recent home sales in your neighborhood, as well as how those homes compare to yours. Realtors may provide this service with no charge or obligation. If you are still unsure of the value of your home, you may wish to pay for an appraisal.

Fair Market Value

      What is the best price for a piece of real estate? Mortgage lenders, appraisers, and real estate agents use what is called the "fair market value" (FMV). FMV has been defined as "the price that a buyer is willing to pay and the seller is willing to accept, when both parties are knowledgeable about the property and neither is under any time pressure to buy or sell". Sounds great, but how is this price determined?
      The starting point for determining a fair price may be an opinion of the value or "competitive market analysis". Such an analysis uses information on similar properties which are: 1) currently for sale, 2) already sold, or 3) expired properties (those which did not sell). Local, national and international trends and market conditions must also be evaluated.
      By comparing similar properties in each of the three categories and the market conditions, appraisers, lenders and agents come very close to the maximum price that buyers would be willing to pay for a house.

Lender's Appraisal

      Many sellers think that the price of their home is determined solely by what they are willing to accept and what the buyer is willing to pay. There is one more variable that can complicate the sale of a home--the lender's appraisal.
      To protect the interest of their investors, the mortgage lender hires an appraiser to give an independent, objective evaluation of what the property is worth. If the appraised value is lower than the selling price, the seller will be glad that he has enlisted the services of a professional Realtor. The agent can give the appraiser information about neighboring homes that have recently sold that support the seller's price. If an appeal to the appraiser is not successful, some delicate negotiations will follow. Both the seller and the buyer may have to make concessions to make the transaction work. The bank may ask the buyers to increase their down payment or ask the sellers for a reduction in price.

Professional Appraisals

      Before your mortgage application is approved, the lender will order a professional appraisal of the home to make sure that the agreed-upon price is in line with the current market value of the home. The appraiser's price will be based on the complexity of the appraisal and the time required.
      A professional appraiser will choose the appraisal technique that is applicable to the particular property to arrive at an unbiased opinion of the value. One technique is to look at comparable homes in the area that have sold for the contractual price within the last six months. The price of each comparable home is adjusted to reflect the differences between it and the house being appraised. If there are a number of similar properties that have sold recently, the appraiser's job is easy. It is more complicated to arrive at the appraised value if your home is located in a rural area or a diverse neighborhood. The appraised value will usually be very close to the sale price. If the appraisal comes in lower, the Realtor may be able to provide the appraisers with additional information on recent sales which will result in increased value.

Three "Caballeros"

When you buy a house or refinance your present home, your lender will ask you to pay for an appraisal to help ensure that the sales price and mortgage amount is consistent with the property's market value. The appraiser will look for "three caballeros" or three "comparables"--homes that are very similar to the one you are buying--and will make adjustments to reflect the differences between the properties.
Housing patterns tend to be homogenous, meaning homes worth $100,00 are located in $100,000 neighborhoods. It is important for properties to be within the general pricing patterns of their neighborhoods because over-valued homes, even if they are exceptional, are sometimes difficult to sell at full market price.
This is not the only factor considered in determining the worth of a property, but it is an important one. The buyer or seller may view the property as a home or an investment, but lenders view it in a completely different way. To a lender, property means security in the event a borrower fails to repay a mortgage. Therefore, lenders must know real estate values in order to limit their risks.