This is a subject that can be very complicated in today’s real estate world, even here in the CSRA. How can we really know the true value of a property?
In theory, an appraisal is supposed to be the most accurate valuation of a real estate transaction. In nearly all purchases, an appraisal is a loan requirement.
So, how does an appraiser determine what a house is worth and what guidelines are they using to determine the value?
The bottom line is that an appraisal is essentially the personal opinion of the one doing the appraisal and the basic guidelines that they are all following. Are there recent sales that support the purchase price?
The appraisal system has been modified to protect the lender from real estate fraud. Essentially, you will not get to pick or even know who is completing the appraisal on a home being purchased with a traditional mortgage. The real estate market collapse of 2008 prompted a system to help eliminate fraud related to values.
The current system has a third-party processing company as the mediator between the mortgage lender and the physical appraiser. This “middleman” receives an order from your bank and then matches someone, hopefully, in the same city of the home being evaluated.
Now, this appraiser receives a copy of your purchase agreement and then physically goes out to the home and measures the square footage, notes significant or valuable features, and takes pictures.
Then, they will look over recent home sales and determine if the home is worth the sales price all parties agreed to, using their opinion of what is valuable. Generally, they will “find” things that compare which support the sales price and all loan guidelines that are associated with the contract they have in hand.
So, essentially, there is no reason a legitimate, arm’s length purchase (meaning all parties are not related or affiliated to one another) should not appraise for the sales price, but nonetheless, it happens all the time.
I’ve been in real estate for almost 20 years now, and as a realtor, I am of the opinion that a home is worth what someone is willing to pay for it. Why? Because what is valuable to each and every one of us varies so vastly, opinion truly drives the value, in every single way.
This is exactly what appraisers are doing, exerting their opinions as the “police” of the real estate market. If you want to have a “real” opinion of value, hire three different appraisers and then take the average of all of their opinions. You are not going to find the same value or even the same homes used to ascertain the value. Opinion drives the choices.
You are also not going to have any tangible equity between purchase price and value, your appraisal should match your contract price. If it comes back higher, it flags as suspicious. If it comes back under, then someone will be taking a hit to their wallet to move forward.
The best advice I can give you is to make absolutely sure the appraiser gets your full contract if your price has been amended and be prepared for anything to happen!
Remember that there is a house for everyone, and it truly is worth whatever you are willing to pay for it! The buyer is essentially the value decider, not the seller or the appraiser.