How Meaningful are Real
Estate Appraisals?
by Dave Dinkel
Real estate appraisals are totally subjective and
often are not an accurate way to determine the value of
a property in some markets. Since the recent sharp
decline of property values and the new loan guidelines
by lenders, not even the most professional appraiser can
any longer say with absolute certainty what a property
is worth. Real estate appraisers can and will give a
subjective value for what a property should be worth,
but even these numbers are open to scrutiny.
Because of infrequent sales, the offering prices of
homes in some areas of the country are sinking faster
than homes are selling. So anyone looking at comparable
sales is seeing sales from months before that traded
well above what a similar home can be bought for
currently. This phenomenon occurs when home sellers
become desperate to sell and believe that only the price
of the home matters to a buyer. Unfortunately, for other
homeowners, this panic to sell brings down values
throughout the neighborhood.
An appraiser will readily admit that his price
estimate or appraised value of a home is an educated,
but always subjective guess. In the final analysis, his
strongest parameter for pricing a single family
residence is a comparable sale in the same neighborhood.
Unfortunately, these comparable sales can be skewed by a
number of factors including distressed sales, seller
concessions at closing that are not part of the public
record, transfers for estate or tax purposes, realtor
commissions included in the sales price, long periods
between sales, and property exchanges that use a
factious market value as a basis for the transfer.
I know an individual who recently sold his home for
$405,000, which was well above fair market value of
$340,000 for his neighborhood. At closing he paid a
$24,300 realtor's commission, gave the buyer a $15,000
seller's concession at closing, included his new
furniture which he just paid $16,700, and paid closing
costs for the buyer of $5,800. His net on this
transaction was $343,200. However, an appraiser will see
$405,000 on the public record and if he used this value
to determine the cost per square foot as a guideline,
his appraisal would be too high for the next property.
The appraiser will see that the property was sold
through a realtor®, but he will not know about the
seller concession or furniture which overvalue the sale
by $31,700. Similar homes in this area were listed at
the same time for $310,000 to $330,000 but hadn't sold,
so how much value should be placed in the $405,000 sale?
I recently received a call from an excited investor
about a seller who was asking $200,000 for her property
which, according to ten comparable sales, was worth
$280,000. The investor had used a ½ mile radius and six
months previous sales as his parameters. By simply
adjusting the comparables to a ¼ mile radius and two
months back, the comparables showed $212,000 as a fair
market value. What a difference a ¼ mile and a few
months make to the expected sales price or value of
theproperty. Had the investor jumped at the
"opportunity" to purchase the property below market
value, he certainly would have suffered a loss when you
include carrying, sales, and repair costs.
In summary, in this market, the way for an investor
or homeowner to get the best estimate of what a property
is worth is to start with the moststringent guidelines,
specifically, one month previous sales and only those
within ¼ mile of the subject property. Next the seller
or buyer should look out ½ mile and back three months at
actual sales to get comparable values. Most importantly,
it is now imperative that buyers and sellers look at
open listings on the MLS (Multiple Listing Service) or
on Realtor.com and carefully check the sale by owner
offerings in the neighborhood. Armed with this
information, a buyer or seller can get a significantly
better idea of FMV, even if it is not what he
expects.
About the Author
Dave Dinkel has over 30 years experience in real
estate investing which has given him a unique
perspective into the workings of the real estate market.
He has developed a CD entitled "How to Sell Your Home in
as Little as 72 Hours", available at no cost for a
limited time by going to http://www.fsbotlc.com and he
shares even more techniques and secrets in his
homeowner's home study course at http://www.fsboautopilot.com
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