Before you buy or sell a house, it’s important to know its market value. As a buyer, you want to pay as little as possible, while still putting in a winning offer. As a seller, you want to maximize the sales price. So how do these two parties ever come to an agreement? Through the use of comparative market analyses (CMAs) and appraisals.
If you’re a seller, you will invariably ask the question, “What’s my house worth?” To which your Realtor should reply, “Let’s look at the CMA I’ve done for your property.” Realtors depend on a database of properties for their market research. The database includes properties of all descriptions that have recently been put up for sale and either sold, remained on the market, or been removed from the market without selling. Your Realtor uses that database to search for properties similar to yours in terms of age, condition, size, style, and location.
In preparing a CMA, your Realtor will review properties that sold, and see how long they were on the market; properties that still haven’t sold, but have remained on the market and may have had price reductions; and properties that never sold and eventually were pulled off the market. Each of these situations provides valuable information about how your property fits into the housing market. The houses that remain on the market are the most interesting to your Realtor, since those are the properties with which your house will compete for the ready, willing, and able buyers. Realtors create CMAs as one of the many services they provide to clients, or even as a way to demonstrate their value to prospective clients. There’s no specific fee for a CMA.
An appraisal, on the other hand, includes similar data but is usually done by a certified or licensed appraiser with hundreds of hours of training and expertise, and most importantly, with no financial stake in the transaction at hand. Lenders depend on this expertise and objectivity to determine the fair market value of a property upon which they make lending decisions. An appraisal is the highest price at which a property is likely to be sold from a willing seller to a willing buyer who both have all the material facts. The cost of an appraisal varies widely from a few hundred dollars to a few thousand dollars (or even tens of thousands of dollars).
Depending on the type of loan and type of property, a lender usually chooses to loan between 50 percent and 100 percent of the appraised value. If you are buying raw land, you can expect closer to 50 percent. If you are buying a commercial property with the first deed of trust, you can expect about 60 percent. If you are buying an owner-occupied, single-family house, you can expect between 75 and 100 percent.
Lenders are not the only ones to use the appraised value. Buyers can use it to negotiate the sales price. In fact, I have a Realtor in my office right now involved in a transaction where the property value is highly subject to opinion. We have sent the seller a letter of intent noting that the buyer is willing to enter into a purchase agreement for whatever the appraised value turns out to be. This particular property will be extremely difficult to appraise and the appraisal will therefore probably cost tens of thousands of dollars. However, with a buyer ready to commit to purchasing the property, the seller may decide the cost of the appraisal is worthwhile.
Neither CMAs nor appraisals are based on exact science. They are both opinions of value, albeit from well-educated sources. Usually, the final sales price falls within 3-5 percent of the appraised value. Now and then a unique property breaks that rule.
If you have questions about real estate or property management, please contact me at email@example.com or call (707) 462-4000. If you’d like to read previous articles, visit my blog at www.richardselzer.com. Dick Selzer is a real estate broker who has been in the business for more than 40 years.