market value vs. appraised value
by Martin Lukac
In the simplest of terms, a home’s “market value”
is based on the perception of the buyer…it is the amount of money
the market is willing to pay for property. The “appraised”
value is the unbiased value of the property as determined by a bank or
lending institution.
Sometimes, most often in a situation with multiple buyers or in a hot
market, offers made on houses will sometimes be higher than the original
listing price. In other occasions, buyers may fall in love with a house
so much that they are willing to risk that it might not appraise at the
purchase price. Regardless of the reason, it is a rare occasion when property
appraisals equal that of market value.
But why?
Appraisals are performed for lenders so that they can justify the sales
when valuing it as collateral for a mortgage loan. With appraisals, most
credibility is given to historical data or comparative sales (which are
sales that have closed in the last four to six months).
There are three primary approaches that an appraiser bases
his professional opinion:
· Direct Comparison Approach - This approach utilizes the theory
that a willing buyer and willing seller of comparable properties will
provide a good estimation of the value of the property under review. The
appraiser will review the selling price and asking (listing price) of
equivalent properties.
· Cost Approach - This approach estimates the cost to build an
identical home or building at current construction costs less any accumulated
depreciation. This value is then added to the value of the underlying
land to arrive at an estimation of market value.
· Income Stream - This approach is generally used to estimate the
value of income producing properties by calculating the present value
(in today's dollars) of future income streams generated by the property
if the property is put to its "best use."
The appraiser will arrive at his or her estimated opinion of value by
selecting the most appropriate approach based on the nature of the property
that can be supported by relevant market data.
What happens when a buyer knowingly bids so high that he risks the appraisal
coming in too low? If you are a seller caught in this situation, you may
want to prepare by making it clear that appraised value is not a contingency
of the sale. You are trying to prevent an offer almost automatically disqualifying
buyers with minimal down payments.
Why? Because a low appraisal value will almost always affect
their ability to qualify for the loan if the bank doesn’t feel that
the value is high enough to justify the mortgage. Lenders typically base
a loan amount on either the appraised value or the purchase price (whichever
is less). If a buyer is applying for a 10%-down mortgage and the appraisal
comes in too low, the loan amount will be calculated based on the appraised
value. In this example, the required down payment would most likely be
ten percent of the appraised value, plus the difference between the appraised
value and the purchase price. If the buyer does not have the additional
cash available, or is "surprised" by the low appraisal, the
transaction is in jeopardy.
So, before you accept that super high offer, you might want to make sure
that the buyer has enough cash available to make a larger down payment
if necessary. If you are the buyer and you absolutely must have the home
even at a higher price, you should always be prepared for the possibility
that you may have to make a larger down payment than anticipated.
About the Author
Martin Lukac,
info@1LoansUSA.com
http://www.1LoansUSA.com
#1 Loans USA (1LoansUSA.com) offers variety of mortgage information. Mortgage
rates for any loan program from various lenders, mortgage rate predictions,
bond rates, CD rates and more.
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