[photopress:bullseye.jpg,thumb,alignright]While “market value” and “appraised value” are not always one in the same, calculating a home’s value is both a science and an art, whether the value is being ascertained by an appraiser or a real estate professional.
The purpose of the valuation can actually have some bearing on the value itself. If you have a client who is purchasing a property to remodel and flip it, the value for that client has to take into consideration the cost of the improvements and the eventual resale value. Consequently, one has to be involved in both knowing, and making recommendations with regard to, which improvements will produce the greatest return, before the client makes an offer on the property.
Just as a lender has to take into consideration many factors when recommending various loan programs, a real estate professional has to take into account many factors before determining a home’s fair market value. When you are representing a seller, you have to lean towards the high end of the value range. An appraiser would call this “highest and best use”. A real estate agent would call that “if purchased by a person of the best buyer profile. For example, someone purchasing a property to live in it, will pay more for a property than a builder who is going to tear it down or an investor who is going to remodel and flip it.
When you represent the buyer, you have to consider the home’s resale value and any money left on the table by the seller. A seller leaves money on the table by various means that are generally not reflected in the asking price itself. I use this test when valuing a property for the buyer: If they called me in a very short period of time to sell it because they decided to move back from where they came from, could I get them out whole, meaning purchase price plus the costs of purchase and sale. By being a “listing agent” in your mind when representing a buyer, an agent will perform a better valuation than if they are just considering how much the buyer wants or likes the property. Of course, the buyer can always choose to pay more than that value and say “I don’t plan to sell it as I plan to live here for a very long time”, but they will at least know how much they are overpaying for the privelege of getting the home. Very important when the buyer is trying to determine the cap on their escalation clause.
Let’s go to the science part of the valuation. Some houses have what are called “true comps”. This would be most true in a very large community of newer homes. I am not going to spend a lot of time on valuing property with “true comps” because here in the Seattle Area, there are very, very few houses that can be valued by those normal methods. In fact the only ones I have been able to value by normal methods have been newer townhomes. Proximity to the subject property is not always relevant, especially in Seattle vs. Eastside. The comps have to be ones built in the same “finish period” and have the same “buyer profile”. For instance, a property built in 1991 may have white cabinets, gray countertops, white appliances and 4″ white tile in the baths. Using that as a comp to a property built in 1995 with granite tile countertops vs. gray laminate and maple cabinets vs. white cabinets, will not produce a reliable end result. Nor would using a comp with granite slab counters, stainless appliances and hardwood floors.
For the most part, we are lucky to find one recent sale that is quite similar to the property we are valuing. I call that the home’s “significant other”. An appraiser will still use three solds, whether similar or not, to ascertain value. A real estate agent will pull the significant other from the solds and move to properties that are pending and STI and ACTIVE in determining what a buyer will pay or should pay or what a seller should set as an asking price.
A few recent examples. When I valued a property for a seller back in May, I had comps of $325,000, $327,000 and $337,000. I priced the townhome at $350,000 and it sold for $350,000. The upward momentum of the marketplace from May was a significant factor. For this particular townhome, best buyer profile was someone who was relocating to the area and the buyer was in fact relocated here for her new job.
When I recently valued a newer townhome at this time of year, I needed to be more “right on target” as we are in a sluggish month of August aka “agents take vacation time month” and running into September which generally has two weeks out of four that are hot. The buyer profile of this particular townhome was a single person who would take in roommates. It did sell quickly and at full price to a student taking in two roommates. The danger on this one was pricing against new construction. You have to be as high as you can without encroaching on the price at which a buyer can get a brand new townhome nearby. I could not use the comps at all when valuing that property, because the subject property was built in 2001 and the comps were 2003 and new. The interior finishes were not comparable and could not compete, so to get a fast full price was their best chance of not having to bargain down to a level below the highest achievable price.
Let’s flip to buyers and how I value a property for a buyer vs. a seller. I’ll have to make this another article as the Vicodin for the root canal is kicking in and I’m going to barf.
Great article … Loved it all, especially the part about representing a buyer with being a listing agent in mind. Very ethical and honest … something lacking these days. Cheers.
For the most part, if you’re within 5% of target you’re good. Anything more accurate is impossible to achieve except in cookie cutter communities where every house is the same and there are dozens of recent sales.
The goal of pricing the house is to ask as much as possible, and at the same time make buyers think that the seller is reasonable and motivated to sell. You want to get offers, and that’s the main point of pricing correctly. All that matters is not the exact price but that you’re within a certain small percentage range of reasonable prices that would induce a buyer to make offers.
Maybe it’s different in Seattle, here in Austin it’s a lot easier, prices don’t vary too much accross the street.
Our prices can vary dramatically across the Street and a few doors away. My house is worth about $925,000, next door is worth about $650,000 and next to that $1,400,000.
Value a house by calling a Certified Appraiser. Anything less is a guess. It will cost you about $300…
Alby,
Appraisers do the same thing realtors do. They look on MLS to see what sold. Sometimes they also may consider the replacement cost if there are absolutely no sales data available.
The only thing appraisers are useful for are commercial and very uniqure properties where past sales records are not normally used. Anyone who uses an appraiser for a residential home is wasting their money. I know of many examples where they are wrong. One house I know of sold for 20% below appraisal because the guy couldn’t find any comps so he used cost approach. This was the biggest house on the block so guess what, it sold for a lot less than it cost to build.
I agree with Jim. Using my example of the townhome I sold at $350,000 with comps of $325,000, $327,000 and $337,000, no way an appraiser would come up with a list price of $350,000. Sellers could cut themshelves short using appraised value as an indication of where to list the home asking pricewise.
Plus, once the owner has an appraisal at say $333,000 can they list it without disclosing the documented lower price? Raises some stickly disclosure issues. In a down market appraisals are great to stick on the table if you are listing at LESS than appraised value. But listing at MORE than appraised value…best not to have an appraisal lying around.
Ardell – I just happened to stumble onto this 5 month old thread but wanted to add a couple of comments.
Your example above represents “unadjusted” sales. The appraiser may have adjusted those for size, age, quality, location, TIME (market appreciation) and have arrived at a “market value” opinion in excess of the highest sale.
Further, when doing pre-listing appraisal assignments, I ALWAYS suggest a List Price higher than market value. Just makes sense doesn’t it? Expecially in a rising market.
The seller does have to “disclose” the appraisers opinion of market value any more than they have to disclose the various broker CMA opinions.
To Jim . . . few appraisers will place any reliance on the Cost Approach for homes that are over 5 years old. If there truly were no homes available for market comparision it’s anybody’s guess and we could ALL be right or wrong in that case.
It’s important to remember that appraisers are often confined by the “intended user” and the “intended use” as to the methods that they can apply to valuing a property. Recent changes (effective 7/2006) gave us greater flexibility in how we define our Scope of Work.
Lender assignments are VERY restrictive in terms of the types of sales, date of sale and location. Pre-listing assignments are more akin to Relocation appraisals. Those are not “Market Value” assignments, but rather “Anticipated Sales Price” assignments. See the difference. Entirely different users and use of the value opinion.
Thanks Brian! Great Stuff! I just added your site to my favorites so I remember to link to it in my sidebar on my blog.
Many thanks for taking the time to give a thorough and useful comment. I recently had an appraisal done and the appraiser made huge adjustments for view considerations that seemed very off to me, since the comps had similar views. Was wondering how he was coming up with that since he had not seen the views from the comps.
Once in a while an agent puts a view in from on the roof or down the street, so I hope (but guess he was) he wasn’t using photos from the mls as a “given” with regard to view. Agent could have been hanging out a window or standing on a roof to get that great view shot.
How does one make deductions for these discretionary issues when both have a view? Do the look at tax record comments like fair vs. good? I don’t find those to be accurate.