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:
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.
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.