During any real estate buy/sell/refinance transaction, be it residential or commercial, the true value of the property is arguably the most critical piece of information for all parties concerned. The Appraised Value of a property, provides an expert's unbiased opinion and insight on the price point at which the Seller can make a competitive listing of the parcel of real property for sale. Such an expert would be a certified real estate appraiser who can provide such insight based on several factors after a physical inspection of the property. Such factors typically are a competitive market analysis, analysis of the construction history, ownership history of the property, physical condition of the property, upgrades, downgrades, conversions, damages, unique features or lack thereof in comparison of the competing properties in the neighborhood, research on public records, specifics on the location of the property and a variety of other factors. Essentially anything that is permanently attached to the property is considered by a real estate appraiser for their appraisal report of the parcel in question.
Such a comprehensive report as in this sample, from an independent licensed real estate appraiser has several implications to all parties involved:
The value provided in the Real Estate Appraisal Report provides a fairly accurate estimate of the price point that they can expect to sell the property or refinance an existing mortgage. If the Seller is working with a real estate broker for the sale of the property, the property may be listed at a price slightly above or lower than the Appraised Value in the report based on the broker's assessment of the report and their knowledge of the market and how much a buyer would be willing to pay for it. This makes the Fair Market Value (FMV) of the property different than the Appraised Value of the property and would typically be the price at which the property would be listed in the MLS. In case of a FSBO (For Sale By Owner) type of transaction, where the owner themselves are placing the property in the market for sale, typically, the Appraised Value of the property from a licensed real estate appraiser would be the listing price of the property, unless the Owner can substantiate to the Buyer that the property is worth more than the Appraised Value. In case of a refinance by the Owner, the financial institution would usually arrange for one of their approved real estate appraisers to perform the appraisal and at their discretion, may ignore an appraisal that the Owner might have privately obtained prior to seeking a refinance transaction. In typical refinance transactions, the Appraised Value and not the FMV, is generally considered as the basis of the transaction
Regardless of the FMV at which the property may be listed in the MLS, or being marketed by the Owner as a FSBO, a Buyer has every right to perform their own Appraisal prior to the transaction to make sure that they are indeed paying a fair price for the property. Since the Appraised Value is based on an appraiser's own expert opinion based on their interpretation of the different factors considered during the appraisal process, the appraised value may vary between appraisers. Professionally performed appraisals typically do not have wide variations unless adequate information was not considered or revealed consistently during the appraisals, however being an opinion nonetheless, variations may occur. In such cases the Buyer may seek a third opinion through another appraiser or negotiate directly with the Seller to come up with an Agreement on the purchase price of the property. If the Seller is highly motivated, in a downward trending market where there is more supply than demand, the Buyer is more likely to have it their way. In a market that is in its upswing, the Seller may hold the trump card in such negotiations. If the Buyer is seeking a mortgage, the financial institution would typically engage their own approved real estate appraiser to perform the appraisal and would generally not be willing to agree to a purchase price higher than the Appraised Value, regardless of what the FMV is or what the Seller is asking for the property.
In today's volatile market and given the recent history of a drastic drop in property values all over the United States, financial institutions have become extremely wary of the amount they are willing to lend for the purchase of real property, the salability of the property itself (in case the Borrower defaults) and the Borrower's financial profile. The purchase price of the property for financial institutions is typically the Appraised Value of the property provided by their approved Real Estate Appraiser, who has thorough knowledge of the neighborhood. Financial institutions typically would not deviate from this Appraised Value as the Purchase Price of the property, since for them it is the lowest risk price point available. This Purchase Price, which is the Appraised Value of the real property, becomes the basis for all subsequent financial calculations and terms that they would offer to the Borrower. The Buyer or Borrower in this case would use that decision from the financial institution to make their own decision on how to proceed further with the transaction.
Whether you are buying, selling or refinancing your real property, typically an escrow company would be involved as the independent party to ensure that all parties in the transactions are getting their fair share of the deal - buying, selling or lending and every related aspect of the transaction is transparent to every party. The escrow company ensures that all bylaws and guidelines of the DRE (Department of Real Estate) are adhered to in the transaction for all parties and the Appraisal Report is a key component that the escrow company would analyze and use that as the basis, following the paper trail leading to and from that Appraisal Report. This is a service provided by the Escrow Company for mutual protection of all parties involved in the transaction.
For real estate brokers representing the Seller and/or the Buyer, the Appraised Value of the property provides a guideline for the amount at which the property sold/bought. While the listing broker may choose a different number as the FMV for the MLS, it is the purchase price that would be ultimate basis of all financial calculations in the transaction. If the Buyer seeks a loan from a financial institution, as explained above, the purchase price of the property would typically be the Appraised Value which would become the basis of broker commissions. Once escrow closes the final sale price of the property, which could well have been that Appraised Value gets entered by the Seller's Broker in the MLS and becomes part of subsequent CMA (Competitive Market Analysis) reports.
So as you can understand the role of a qualified real estate appraiser with a thorough knowledge of the current market conditions in your neighborhood is critical to ensure that you get a fair deal in the transaction, whether you are a Seller, Owner, Buyer, Financial Institution or Real Estate Broker. Contact us today for a qualified and experienced real estate appraiser in your neighborhood in Arizona, Southern California or Wisconsin.