Here's a topic that can really light people up!! Ever try to buy a home, find yourself in a bidding war, battle through it to "victory", only to find out that your "winning" bid was higher than the appraisal? Okay, what next? Clearly the home is worth what you bid for it, because you and six other people who really loved it were willing to pay that much (or maybe even more!!) for it. Any real estate agent will tell you...a house is "worth" whatever a buyer will pay for it. But wait...what if that buyer can't get a loan to actually PAY that amount?
What you WOULD pay, and what you CAN pay are often very different things! The bank, you see, is not going to lend more money than what the MARKET says the house is "worth". That is a different "value" known as Market Value. Market value may be VERY DIFFERENT than what a buyer might be willing to pay if that buyer really MUST HAVE a certain home. Similarly, a seller who LOVES their home and raised their family there may feel the value is much higher than the market value suggests. None of those "values" are wrong. That seller might be in a position to "pay" for what they think the home is worth by simply holding onto it, maybe even with it still on the market, and refusing lower offers as they come along. That, of course, is his or her prerogative. That can be very frustrating for buyers who want the home and know the market value is MUCH lower than the list price, but it's reality. It may also be frustrating for the seller, who is astonished that they can find NO BUYERS who share their view of the worth of their home. Again...reality. As with so many things in life, luck plays a big part in all of this. The seller with the lofty opinion of the value of their home may be lucky enough to find the 1 in 1,000 potential buyers who LOVES the house and will pay the high price. They would also have to be lucky enough that this buyer has the funds to buy the home even when the bank will only lend themÂ half the money. But hey..you never know!!
The appraisal should match the market value of the home. All too often, though, Appraisers don't do a real appraisal, they just make sure the appraisal is high enough to make the loan work. I re-financed a home a few years ago that had a market value of between $300k and $350k. I was only re-financing half that amount, and (low and behold!!) the appraisal came in just above the refi amount, nowhere near the market value of the home. That's one of my pet peeves...if I am paying an Appraiser to appraise my property (regardless of reason), I EXPECT them to give me a reasonable estimate of current market value!! I've seen sloppy appraisals that said the home had a brick driveway or an asphalt roof, when the driveway was really cement and the roof metal...typically the result of failure to change the form they were over-writing. Sloppy!
The bank is really just looking to make sure that they can get back the amount they are loaning on the property in the event they have to foreclose. That's why they have the down payment, as well, it as insurance against the market value dipping below the loan amount. If the appraisal comes in too high...no problem, the bank has a big cushion. But if it's too low you'll have to make some decisions...get a second appraisal (at your additional expense), or make up the difference out of pocket. If you really love the place and you have the means that is an option. For many, it's not an option and can be the source of considerable angst.
While the Market Value should typically be expressed in a range (ie: $475k to $500k), it is a fairly scientific figure with a little bit of "art" thrown in. Where it gets tricky (and often more "artsy") is where there are no recent sales of similar homes to compare with. Very interesting subject, often clouded by emotion, and NEVER as simple and straight-forward as we would all like it to be! But even with all the vague characteristics of a good appraisal, it is definitely something you need to get a solid loan, and therefore a critical piece of the home-buying puzzle. Appraisers are like lenders in that the best way to find a good one is through recommendations from people you know and trust. Real estate agents will be in a better position to recommend an appraiser than most non-professionals, since they deal with them far more often than the average person.
So if you're looking for a good Appraiser in Paradise, or if I can be of any help at all in your Key West real estate quest...give me a shout at 305-393-6531, or drop me a line at Jim@OliveKeyWest.com
I can help you find YOUR slice of Paradise.