Sale Price vs. Appraised (or Market) Value
Nov 30, 2015
You may not know the square footage of your living room, but you know it’s the perfect place for your holiday tree. You may not care about parking in your driveway and instead decide to install a fire pit there for entertaining on cold nights.
People tend to view their homes emotionally, and that can become quickly apparent when they decide to sell. They may price the home too high, causing it to languish on the market. Or they may set the asking price too low.
For a sale to proceed, there must be a “meeting of the minds,” notes the Houston Chronicle. “The seller, the buyer and the lender must find an agreeable value to attach to a property.” According to the paper, this happens when the sale price and the appraised value of the home are as close to each other as possible.
What Is Sale Price?
Pricing a home can be a “delicate balance,” Mike McCann, a real estate professional with Berkshire Hathaway HomeServices, Fox & Roach in Philadelphia, tells Realtor.org. “You have to balance the comparables with sellers’ unrealistic expectations about what their home is really worth,” McCann says.
Sellers often want to price a home higher than what the market can bear. “On the other hand, some sellers or agents may be tempted to set the asking price low in the hopes of generating a buyer frenzy and quick sale,” says McCann.
Fannie Mae (which publishes The Home Story) works with local real estate professionals to help establish list prices on properties it owns that are for sale nationwide (known as Real Estate Owned or REO). “We want the list price to attract buyers and still give us the most return on that investment for taxpayers,” says Steven Corbin, director for valuation in Fannie Mae’s CPM Real Estate division.
While a seller can set an asking price, that amount may not be necessarily in agreement with what buyers are willing to pay. For example, one person can view a property, determine it is exactly what they are looking for and well worth the asking price, whereas another person could look at the same property and feel the asking price is too high.
“Someone may have driven by the property countless times, and they really want to live in that house,” explains Corbin. “So in reality they may overbid for that property. This would be a situation where the actions of a specific buyer do not represent the actions of a typical buyer.”
He adds: “From a lending perspective, a bank would want to know the probable price a typical buyer would offer for the property. That’s what an appraiser would set as the market value.”
What Is Appraised Value?
When a contract is established on a property, an appraised value is determined by a professional real estate appraiser. The appraiser works on the lender’s behalf to determine that value by taking many factors into consideration, including the neighborhood, the value of properties of similar size and construction, and even such things as the type of fixtures on the premises and layout of the floor plan.
Setting an appraised value for a home can be tricky. Even when properties are just blocks apart, their values can differ greatly. One could be closer to public transit or in a different school district, for example. A professional appraiser takes all that, and more, into account.
The type of value they provide is spelled out in the engagement letter provided by the lender. Notes Corbin, “Based off of the bank/client’s needs spelled out in the engagement letter, the appraiser develops a scope of work. They may put on market value, liquidation value, insurance value or many other types of value but within mortgage lending, a majority of the time they are contracted to provide market value.”
Why Do All These Prices Matter?
A large gap between the appraised value and the asking price can be a problem for the seller. For example, notes Corbin, a seller might list a property for $250,000, but if buyers are only willing to pay $200,000, then the market value is $200,000. Conversely, if a property listed at $250,000 has several buyers interested, the market value can meet or exceed the listed price based off of the market demand.
If the property is over-improved compared to others in the neighborhood, a lender might be less willing to grant a loan for the property because it does not fall within the historical trend of the neighborhood. The lender also may not accept an appraisal it feels is too low.
In the end, all parties must agree to the terms of the sales contract based off of the home’s appraised value for the sale to move forward. “This might involve some compromise,” says Corbin.