February 22nd, 2010 | 
Author: How Meaningful Are Real Estate Appraisals?
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 405000 which was well above fair market value of 340000 for his neighborhood. At closing he paid a 24300 realtor’s commission gave the buyer a 15000 seller’s concession at closing included his new furniture which he just paid 16700 and paid closing costs for the buyer of 5800. His net on this transaction was 343200. However an appraiser will see 405000 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 31700. Similar homes in this area were listed at the same time for 310000 to 330000 but hadn’t sold so how much value should be placed in the 405000 sale?
I recently received a call from an excited investor about a seller who was asking 200000 for her property which according to ten comparable sales was worth 280000. The investor had used a mile radius and six months previous sales as his parameters. By simply adjusting the comparables to a mile radius and two months back the comparables showed 212000 as a fair market value. What a difference a 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 mile of the subject property. Next the seller or buyer should look out 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 writer: 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 www.fsboTLC.com and he shares even more techniques and secrets in his homeowner’s home study course at www.FSBOautopilot.com
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