The other day a potential listing client of mine asked me a great question. She wanted to know why her home appraised for higher than the amount that I was suggesting she list for. I get this question a good deal and wanted to let you guys in on what I believe to be the "skinny" on appraisal vs. market values. Keep in mind my opinions are just that,opinions, and I do not mean to imply that this blanket summary includes everyone...but by golly, it includes most!
So here is my answer to her, via email. All names and places have been changed to protect the innocent.
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Yes, there is a difference in Broker market opinions and re-finance appraisals. Broker's market opinions, such as the one that I completed, factors in what a potential buyer and yourselves, as sellers can agree to, based on what else is currently on the market during this snapshot in time and what kind of competition you are dealing with.
We are NOT appraisers and do not look as specifically as an appraiser would at cost of replacement, adjusted price per square footage, upgrades and other adjustments. We look at a "sell factor" of our current market inventory. Though our approach may not be scientific, it is pretty darn accurate because we, as Brokers, have been in most of the homes or the neighborhoods that we are using as comparable. If we haven't had that opportunity, the Broker is usually up to date on what various price points and styles bring in a given area.
Another factor that weighs heavily on pricing is inventory. Currently we have 12 months of inventory, which means that at the current rate of absorption and number of buyers out there, it would take 12 months to get the current homes off the market and sold with NO others coming onto the market. You can either be priced to be at the top of that 12 month cycle, in the middle at 6 months or at the end…with prices anticipated to fall over 10% total in ’09, pricing high is not a risk I would advise taking.
On a refinance appraisal, the bank is taking into account that you need to have equity because they are not going to typically lend you over 80% LTV…that being said, they also anticipate that because you are re-financing that you plan on staying in the home long enough to re-coup the cost of refinancing which usually runs 3% or more. It would make little sense to re-finance, pay the costs associated with it and then move within the year. It takes approx. 3-5 years to absorb that cost, therefore the bank can be a little more gracious with your values because they are coupling a realistic look at today’s values with future values—helping you as a homeowner to achieve your goal to either improve the home and it's condition, thus improving value getting that higher number or helping you to consolidate debt, thus putting you in a better position to remain in the home for years to come.
For example, if an existing home had a re-finance appraisal at $310K a year ago and I know that the market value is not over $275-280 if the seller needed to sell in the next 6 months or less given the amount of inventory, the condition and the pricing of competitive homes and the amount of new construction that still saturates the market with viable choices and incredible incentives…that doesn’t even begin to touch the iceberg as foreclosures continue to come into the picture…which is why I leave them out of my comps, because we know owner occupied homes are typically in much better condition.
A great deal goes into valuing a home for re-finance, re-sell or purchase, however the end results may be different. If the values are really far apart, then this may be a red flag as to something going on. My advice is to keep in mind what it is you are trying to achieve, don't stretch values and rely on professional Realtors for valuing your home in today's market and rely on professional appraisers to value your home for re-finances and purchases.
Brooke
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