Sunday
Nov252012
Appraisal is an Opinion of Value
Brian Donlyuk - Vista Filare Specialist
An Appraisal is an opinion of value at a given time. Appraising a property is an art, as comparable properties are not exact replicas of each other and the appraiser must make adjustments for extra features. They are not absolute science and thus need to be viewed merely as a guideline.
The definition of market value: Amount of cash or cash equivalent that is most likely to be paid for a property on a given date in a fair and reasonable open market transaction.
[caption id="attachment_1881" align="alignleft" width="150"]
Steps to buying a home[/caption]
The most common need for an appraisal in real estate is when the bank is asked to make a loan on a property that is used as collateral. To be sure, banks are institutions of people who deal in numbers only. Therefore, if the buyer seeks a loan of 96.5%, 95%, 80% of value, the bank must use an absolute number to establish the exact loan amount. Much ado has been made of appraisals and valuations coming in "too high" or "too low" during a real estate transaction.
If a short sale valuation or BPO (broker price opinion) comes in too high for a short sale approval, the lender thinks they can get a higher price than is actually being offered. That is often the case, but most of the time the problem lies in the method and source used to arrive at the valuation. That's an entirely other blog post...
In a standard sale, when the buyer's lender orders an appraisal to establish the value for a loan, a low appraisal means that the buyer can still buy the property but has to come up with more cash. Let's say the buyer made an offer of $ 500,000 with an intended down payment of 20% or 100,000 and the appraised value comes in at $ 493,000. There were no recent comparable sales, so the appraiser had to make several adjustments to arrive at the value. Each adjustment involves somewhat of a guess as to the value or detriment of the adjustment in dollars, and you can see how the end result can have a 10,000 variance.
How the bank reacts to a low appraisal: They will lend 80% on 493,000, i.e. 394,400, requiring the buyer to increase the down payment by $ 5600.
How most buyers react to low appraisal: Holy cow, I am paying too much for this house. I better cancel the deal or renegotiate price with the seller (even though the house fits my needs perfectly and I have not seen one as nice in the six months I have been looking). Renegotiating occasionally works, but not in a hot market where the seller has multiple offers.
How the realistic buyer thinks after reviewing the appraisal report and how the value was arrived at: Luckily I have the extra $ 5600. Based on the homes I have seen during the last six months, this one is worth it to ME. Unfortunately, if the extra cash is not on hand, the deal is likely to fall out.
The definition of market value: Amount of cash or cash equivalent that is most likely to be paid for a property on a given date in a fair and reasonable open market transaction.
[caption id="attachment_1881" align="alignleft" width="150"]
Steps to buying a home[/caption]The most common need for an appraisal in real estate is when the bank is asked to make a loan on a property that is used as collateral. To be sure, banks are institutions of people who deal in numbers only. Therefore, if the buyer seeks a loan of 96.5%, 95%, 80% of value, the bank must use an absolute number to establish the exact loan amount. Much ado has been made of appraisals and valuations coming in "too high" or "too low" during a real estate transaction.
If a short sale valuation or BPO (broker price opinion) comes in too high for a short sale approval, the lender thinks they can get a higher price than is actually being offered. That is often the case, but most of the time the problem lies in the method and source used to arrive at the valuation. That's an entirely other blog post...
In a standard sale, when the buyer's lender orders an appraisal to establish the value for a loan, a low appraisal means that the buyer can still buy the property but has to come up with more cash. Let's say the buyer made an offer of $ 500,000 with an intended down payment of 20% or 100,000 and the appraised value comes in at $ 493,000. There were no recent comparable sales, so the appraiser had to make several adjustments to arrive at the value. Each adjustment involves somewhat of a guess as to the value or detriment of the adjustment in dollars, and you can see how the end result can have a 10,000 variance.
How the bank reacts to a low appraisal: They will lend 80% on 493,000, i.e. 394,400, requiring the buyer to increase the down payment by $ 5600.
How most buyers react to low appraisal: Holy cow, I am paying too much for this house. I better cancel the deal or renegotiate price with the seller (even though the house fits my needs perfectly and I have not seen one as nice in the six months I have been looking). Renegotiating occasionally works, but not in a hot market where the seller has multiple offers.
How the realistic buyer thinks after reviewing the appraisal report and how the value was arrived at: Luckily I have the extra $ 5600. Based on the homes I have seen during the last six months, this one is worth it to ME. Unfortunately, if the extra cash is not on hand, the deal is likely to fall out.
Reader Comments