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Establishing the List Price: It's all about the Appraisal!

Reblogger
Real Estate Agent with McCall Montgomery Real Estate

THIS IS A REALLY GREAT POST AND I AM GLAD I AM ABLE TO REBLOG IT FOR ALL OF THE OTHER RAIN MAKERS OUT THERE.  KEEP THEM COMING BECAUSE THEY DO HELP GIVE GOOD INSIGHT.

Original content by A. Daniel Bouchard

In today's home selling environment the most difficult task may be in coming up with the right list price on a property.

  • My neighbor's house sold for $xxx,xxx 6 months ago, therefore mine is worth 10% more now
  • If I price it $20,000 more than I expect, I will get more in the end.
  • I need to price it for $xxx,xxx because I owe almost that much on it and I am desperate to get rid of it.
  • I need to price it higher, because I know I will be hit with building inspection issues.

These ideas and others like them have been around for hundreds of years. But in truth there really is only one good justifying logic that prevails above all else:

What Will It Appraise For?

Indeed if we lived in the all cash world of our ancestors, this question would be irrelevant. But the truth is, all cash deals are almost never the way real estate is sold today.

With the recent mortgage meltdown of the last 3 years, an entire new culture has evolved within the world of Real Estate Appraisals. Gone of the days of flexibility and rationalizations to justify sky rocketing sale prices. Today's appraisers are scrutinized from every which way they can imagine.

Particularly in markets designated as "Declining Market Areas". You might very well be surprised what is designated as a "Declining Market".

What all of this discussion really boils down to is the fact that appraisers today can only look at the most recent 3 months of sales to justify a contract price in most circumstances. Additionally, looking outside of a development area is also no longer an easy justification to make.

If your subdivision homes identical to yours were selling for $600,000 3 months ago but today larger, newer, better homes have sold for that same price, What do you think will happen when that appraiser happens to review that data as applicable to your home? You guessed it, PRICE REDUCTION!

When that appraiser submits that official Appraisal Report to the underwriting department at ABC Bank, ABC's underwriters will turn around and recalculate the loan accordingly. So if your buyer had a 96.5% FHA loan on a $600,000 purchase price that now appraises for $587,900, the bank is still only going to lend 96.5% but now it will be based on the $587,900 Appraisal Value. Regardless of what the contract says.

In most jurisdictions that means one of three things will happen:

  1. The buyer can come up with the extra cash to make up the difference.
  2. The buyer will decide to walk away and not buy the property at all.
  3. The buyer will renegotiate the sale price to the appraised value.

Lets discuss:

Option 1:

If the buyer is using an FHA 96.5% Loan today, it is likely that they don't have a great deal of cash to throw around. Especially if they have also asked for help to pay their closing costs.

Obviously this is not an option that is attractive for most buyers and likely will force them to look at the other options.

Option 2:

This option is very real for buyers especially if this is their first home purchase and they are afraid to get in over their heads. The fact that a property appraised for significantly less than they had negotiated to pay, might just raise all kinds of alarm bells for them and make a solid secure buyer turn into an indecisive and uncommitted buyer if they do proceed.

Obviously a seller doesn't want to lose a buyer this way. Especially, if this is an FHA deal. Because, the appraisal will stay in the FHA system database for the next buyer. So even if a second appraiser WANTED to appraise the property for higher, the lower value would prevail

Option 3:

The lesser of the evils ESPECIALLY on an FHA deal is to simply agree without fuss to lower the sale price to the appraised value and proceed to settlement.

Unless of course the seller decides that selling the home at that price is simply not acceptable or possible.

Obviously the choices are not desirable in either situation. Therefore it is far wiser to shoot for a list price and target sale price that will have strong Appraisal justification.

In today's market property appreciation values are inconsistent at best. Even in the best high demand neighborhoods.

What was a perfectly rational reasonable list price 3-4 months ago may now today be simply a "Pipe Dream".

Better play it safe and not gamble with the prospect of having to play "Catch the Falling Home Values"!

 

I am eager to speak to any prospective DC/VA/MD home buyers or sellers, or other persons just needing information or advise. dan@bouchardgroup.net

 

Dan is not a high pressure kind of person who will push, prod, or coax anyone into anything they are not ready to go into on their own. Its just not his nature.

 

A. Daniel Bouchard    Service, Results, Integrity you can COUNT On!     www.BouchardGroup.net   

202-309-2339 mobile     http://www.facebook.com/home.php?#!/profile.php?id=1369850778

Under-promising and over delivering is what I strive for!

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Posted by

Carri "Mac" Brown- REALTOR

www.mccallmontgomery.com

www.carribrown.com

www.ouragentswin.com

 

Comments (1)

Stanley Stepak
Howard Hanna - Avon Lake, OH - Avon Lake, OH
Realtor - Avon Lake, Avon, Bay Village, Westlake,

Cari, Very good points here.  Great advice for sellers.  Have a happy new year.

Dec 27, 2010 11:02 AM