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Market
Value vs. Appraised Value
The interesting thing about homes is that their real
value has almost nothing to do with what they are bought and sold for. Well, this is an exaggeration, but when you
think of it, buying or selling a home can be as deceptive as Jack buying some
magic beans.
Here are the basic definitions:
Market value:
This
is the price that the people looking at your home are willing to pay for
it. If just about everyone coming
by your home says that they are willing to pay $200,000, then the market
value of your home is $200,000.
There isn’t a whole lot you can do to change that.
The
tricky thing about market value is that it can take into account factors
that are completely out of the seller’s control. For instance, an elderly couple walks into a new home and
instantly it reminds them of the home they first lived in. Nostalgia in this case could make the
home worth thousands more, simply for that reason.
Or,
maybe the husband is a little nervous and feels that the home is
haunted. This may seem like a
joke, but you would be surprised to find out just how often someone claims
that ‘getting bad vibes’ from a home is a reason not to buy it. In this case however, no matter what
the price, that customers is not going to buy the home.
Appraised value:
The
appraised value is basically what the bank thinks your home is worth. This can include everything from what
neighborhood you live in, to how many fixtures you have in your kitchen. The appraised value tends to be
unbiased, because the bank is not looking to bargain with you. They need an accurate assessment.
It
is very very rare that the appraised value of a home is the same as the
market value. Why is this?
Essentially
the appraised value of your home is determined in order to justify the
rate of the mortgage loan. This
price is based on historical data and previous sales comparisons. That means sales of similar homes in
the past six months.
You
may encounter some problems if there is a large gap between the appraised
value of the home and purchase price being offered. For instance if a buyer decides that
they absolutely must have a home and they are willing to pay for it, they
mat be in for shock when they discover what the down payment is.
If
the purchase price is much higher they bank may determine that the
apprised value of the home is not enough to cover the requested mortgage
they will often raise the down payment.
This
situation may not emotionally deter the buyer, but, coming up with an
extra 2 or 3% of the purchase can translate into thousands of
dollars. And as we all know coming
up with cold hard cash like that can be a real problem.
Therefore,
be aware of what similar appraised vales of home in your area are. This will lessen the shock of the
purchase. Also, if you can afford
the initial down payment you will end up paying less for the home in the
long run, providing the bank gives you the mortgage rate that you wish. In this housing market that is quite
possible.
Perception
vs. Reality in Realty
The really big issue at hand here is perception vs.
reality. No this is not the name of a
Pink Floyd box set or DVD.
As was mentioned before, sometimes buyers will just
‘fall in love’ with a home. They will
be willing to go to great lengths to get that home. However, banks don’t care if you ‘love’ the house or not, they
are unbiased and they will appraise the home at what they think is its value.
Fundamentally lenders not buyers perform
appraisals. There has to be the feeling
that the buyer is making a solid investment.
This makes sense because of the massive mature of most mortgages the
home is the collateral with which you borrow money to buy the same home.
As was mentioned before the appraised value is based
on historical data and comparisons with similar homes that have sold over the
past six months. This is not carved in
stone. If the market is fluctuating
wildly, other factors may enter the picture, so keep aware at all times.
In the past six months, for instance, the average
sale price of a home in the United States has gone up a solid $20,000. It is this kind of data that the lender will
look at when they are making the appraisal.
Of course if there are multiple bidders this raises
flags that for whatever reason the home may be worth more. This is the only instance, in the face of
overwhelming interest, where the lender may take into account peoples emotions.
When the appraisal comes in way under the market
value the seller has some decisions to make, and the buyer should be aware of
what their tactics are. Often they will
present a counter-offer that is not based on the appraised value. This will almost automatically eliminate
many buyers that cannot afford that initial down payment.
As a buyer this could go either way. It could means that you cannot afford the
home, which means you should take it as a lesson and start looking
elsewhere. If you can afford it, it means
that there will be fewer buyers contributing to an increase in the price of the
home. This will not only save you
money, but if you can afford the initial down payment it means you will save
money over the long term.
Make sure that before, or during the bidding process
you have done your own research and you know what home appraisals in the area
have gone for in the past.
Lowest common denominator:
Sometimes,
the market value of the home will be lower than the appraised value. No matter what the situation the lender
will base the mortgage on whichever one is lower. It’s how they cover their bases and
make sure the market stays stable.
In
the case that the appraised value of the home is lower, lets say that it
is 5%, the lender will use the difference between the two to calculate the
down payment. So make sure you
have at least 10% set aside for this contingency.
One last thing:
It is important to know the assessed value of
your home for a couple other reasons.
Let’s say you have gone through the bidding process and you have
managed to come up with the necessary down payment.
The assessed value of your home will also be
crucial when you re sell the home (if you do) there are no guarantees that
the appraised value of your home will increase and this could have as much
to do with the national economy, your neighbors and a host of other
factors.
The assessed value of your home will also affect
how much you pay annually in taxes.
The municipal government uses these value statistics to determine
how much tax they collect from you.
So if you are astounded that the appraised value of your home was
so high, know that over the course of time, the money you saved on a down
payment could in fact.
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