Appraisal value does not equal market valueAn appraisal is an opinion of real estate value  by a licensed appraiser, employed when a house or condo is under contract or sale pending with a mortgage, so that the lender does not over-invest. In other words, when an appraisal is used in escrow, it is to protect the bank which is lending money on the property. Appraisals may be used at other times, too.

Market value is what home buyers and sellers will agree on as the sale price of a property.  When Realtors work up a comparative market analysis or competitive market analysis, they try to figure out where the home will sell in the future, or what the market value will be.  They will also strive to bring that sale price to the top of the possible range of likely values – or go beyond it.

Put another way, appraisals attempt to determine the most precise value for what a home should be worth. Home buyers may or may not agree with an appraisal’s results, though.  The appraisal value does not equal market value.   The market may find the property to be worth more or less than what an official appraisal states as the worth of the real estate.

With an appraisal, there is a subjective element to the opinion of value.  For instance, if a brand new kitchen sink is tangerine in color but in great condition, will the appraiser ding it for being unpopular, or value it higher for being new?  I can tell you that most Realtors would take off projected value for that poor color choice – but I doubt that an appraiser would.  How about a flag lot? Is that worth more or less than a standard lot on the street? Most buyers would prefer a home on the street, and that may impact the sale price, but will an appraiser devalue a flag lot? Maybe.

Or with a view, how much is it worth?  Recently I sold a Saratoga home with a fantastic, once in a lifetime view.  The appraiser who came out for the bank downplayed the view as not having much value at all.  The home buyers who bid on the property, though, thought it was all about the view.

Fair market value is when there is just one buyer (or couple) and one seller (or couple) and the property is purchased with no undue pressure on either side.  It’s not a fire sale for the seller.  The buyer isn’t competing in a crazy multiple offer situation.  The appraisal will have the best odds of matching market value in this circumstance, but even then, it’s no guarantee. In the San Jose area, if there’s only one buyer for the residence and it’s a moderately priced piece of real estate, there may be something wrong that makes buyers somewhat devalue the home. (This is because we have perpetually low inventory – at least as of this writing in 2017.)

In a rapidly appreciating market, appraisal values often lag the probable buyer’s value (or market value). This is because appraisals are always backwards looking in time.  They consider the closed sales.  If a property closed escrow 3 months ago, that purchase price was probably agreed upon 4 months ago, since most escrows run about 30 days.  With multiple offer situations, we may get 6 offers on a Silicon Valley home and four of them can be at a certain number – but the appraisal comes in lower.

Home buyers decide on their pricing based on sold homes which are similar as well as the current competition and the trajectory of the market.  In spots, they say “run to where the ball is going“. If you run to where the ball is now, you will miss it.  So too with an actively changing market.

Sometimes the market gets soft, either generally or in certain pockets or pricing tiers.  When that happens, home sellers can find themselves frustrated if there was a recent appraisal but home buyers don’t agree with the stated value.  “But the appraisal said it’s worth MORE!”  Buyers don’t care about the appraisal. If the buyers who step up to the plate with an offer are the only ones bidding, there’s a good chance that the ultimate sale price negotiated will be the true market value.  That does not make the appraisal wrong, it only means that either prices have gone down a bit since the appraisal or that market conditions have created a lower sale price.

 

 

 

Related reading:

All comps are not equal

Home inspection vs. appraisal

Valuation: price per square foot is only part of the answer

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Mary Pope-Handy
Realtor
ABR, CIPS, CRS, SRES
Sereno Group Real Estate
214 Los Gatos-Saratoga Rd
Los Gatos, CA 95030
408 204-7673
Mary (at) PopeHandy.com
License# 01153805


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