Many home owners trust the judgement of a realtor to properly price their home to sell. While realtors are trusted professionals in their market areas, they can only provide a comparative market analysis (CMA) to determine a list price for your property. Most CMAs are accurate; however, there are some properties which are atypical for the neighborhood or area that would benefit from a list price appraisal. When a property is priced correctly, sellers minimize their time on the market and maximize the sale price.
Realtors work on commission so naturally, the more your property sells for, the more money they earn. In contrast, if your house does not sell, the realtor invests time and marketing without earning any money at all. The problem occurs when a property sits stagnant on the market; it attracts fewer buyer who think that there is something wrong with the property or that it just overpriced. The solution- a list price appraisal.
I am sure you are asking what the difference is between an appraisal value and a realtor’s CMA, so please let me explain. A realtor chooses several properties like yours to input into a data base and the software generates an automated value. In most cases, for example, in a “cookie cutter” development where houses are similar in age, condition, site size, and interior square footage, a CMA works well. However, in some neighborhoods, houses are in either superior or inferior size, conditions, and property upgrades that a CMA just does not work. The same holds true for a property on a busy road, by an active railway, in a school zone, or on a larger than typical plot of land. If the CMA is inaccurate, so is the listing price.
Appraisals work much differently than CMAs. First and foremost, the appraiser develops an independent opinion of market value. Since the appraiser is a disinterested party who is not working on a commission, the only job of the appraiser is to develop an opinion of fair market value for your property and not an inflated list price. In all fairness, in most cases when a property is overpriced, it is due to pressure that a homeowner with unrealistic expectations places on the realtor. As real estate professionals, we all get it- it is your pride of home ownership and you want to maximum your profit.
Unlike a CMA, a real estate appraiser will inspect your property, measure the dwelling, and sketch a floor plan. A very important component of the appraisal process gathering correct and true property characteristics by visual inspection, such as location, property condition, room count, basement size, and most importantly, the gross living area (GLA) which is the true square footage of the dwelling. Measuring the GLA is not something realtors do; they rely on the tax records which in many instances are incorrect. An incorrect GLA can significantly alter the market value either in a positive or negative way.
After the appraiser assesses all of the relevant property characteristics, he/she will find at least three sold properties within a reasonable period of time and begin a market derived adjustment process for inferior and superior amenities that your property has or lacks as compared to the properties that sold in close proximity to yours. Sometimes, there are none and it becomes the appraiser’s job to determine the value placed on the market reaction to the different locations, amenities or property conditions to develop an opinion of value. Needless to say, this is a much more time-consuming process than creating a CMA as this process takes a lot of time and research.
List price appraisals benefit both buyers and sellers in various ways. For the seller and listing agent, a list price appraisal can determine a list price to quickly and efficiently sell the property for maximum profit. This means a shorter marketing time, more showings from potential buyers, and little or no hassle when the time comes for the lender’s appraisal. Further, a list price appraisal provides proof that the seller performed due diligence regarding the listing price; they did not try to inflate the value. Then, the list price appraisal becomes a great marketing tool; the seller and the listing agent have market data to support the list price. If a buyer submits an offer lower than the appraisal value, the seller has proof that the property is worth more than the offer and the appraisal becomes a bargaining chip for the seller to maximize the sale price.
Most properties sold are financed through banks and local lenders which are subject to an appraisal ordered by the lender. With few exceptions, lenders order appraisals to make sure they are investing their money wisely and the appraisal price is equal to or greater than the contract price. The buyer and the lender are protected by the mortgage process because it becomes a problem when the purchase appraisal value falls short of the contract price. If a buyer is using conventional financing, the buyer must make up for the short fall between the purchase price and the appraisal value. But, some buyers simply will not spend their hard-earned money on a property that is not worth what they are paying. Further, if a buyer is using FHA financing, the appraisal value MUST be equal to or over the contract price of the FHA will not insure the loan. In either case, the buyer will want to renegotiate, or the deal may quickly dissolve.
Some buyers, like first-time home buyers, are shopping outside of their maximum price range offer lower than list price to see if the seller will take less money than the property is worth. If the seller does not know the true market value of the property, the unknowing seller may decide to take the offer and not maximize their value- this happens many times with estate and divorce sales. Of course, no party to the transaction will have to worry about lender appraisal issues. And then there are cash buyers, investors, and flippers investors lurking in every market area. These buyers tend to make offers and not worry about what they are paying because their offers are so low; however, there are some investors who will order a purchase price appraisal to make sure they are not overpaying for the property.
These scenarios are just a few of the many reasons to have a list price appraisal. Bottom line- buyers want to maximize their buying potential while sellers want to maximize their profits. In closing, the list price appraisal serves as a useful tool for both parties to help facilitate a quick and easy real estate transaction.
~Maria A. Nucci, SCRREA