How Meaningful Are Real Estate Appraisals? By Dave Dinkel At Isnare.com Ezine Articles

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 the property. 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 most stringent 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 http://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.

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