Seller Question – How much is my house worth?
Please, sellers, don’t take offense, but this is not a valid equation to figure the value of your house. What you and your neighbors paid for their houses, if it was more than three to six months ago, has no bearing on today’s value and neither does inflation. Even if inflation were a factor, in the past several years, I don’t believe the Social Security Administration has acknowledged that prices may have gone up. And, you definitely can’t count on county tax records that many sellers cite as proof of the value of their property. Years ago, when labor was much less expensive, larger counties like Johnson in Kansas and Jackson in Missouri, appraised homes on a regular basis, generally every couple of years. Today, most tax records are only updated when someone buys a home, and the county records the sale. If you happen to live in a neighborhood with infrequent sales, or there were a lot of foreclosures or short sales a few years ago, your tax records are probably inaccurate.
The money you have poured into your home since you bought it may or may not have implications in its worth. What you spent the money on, such as upgrading kitchens or baths, may make a difference. If money was spent repairing a decaying foundation or cutting down a dead tree, it’s a whole different story. I will get into the difference between deferred maintenance and upgrades to a home in an upcoming article.
Today’s Runaway Prices
The answer to the question is, Your house is worth what someone is willing to pay for it today, with a small caveat. I’ve discussed the difference between Sellers’ and Buyers’ Markets in a previous article. In Johnson County, Kansas, where I live, for the last several years we always seem to be in a sellers’ market even in what you might consider the slower real estate months with holidays and cold weather, which is great for you. I showed some young prospective buyers homes on December 11th. The home they fell in love with had gone on the market that morning. At 3:30 pm, I called the listing agent to see if someone else was interested in the property, and he reported another agent was supposed to send in an offer before the end of the day. I told him to keep his eyes peeled because we were also making an offer. My clients were so anxious they wanted to offer $5,000 over the asking price. I helped them understand the implications of different prices and negotiating tactics, and we must have made the right choices as the sellers did accept our initial offer. That brings me to the caveat.
Here’s the Caveat – the Appraisal
What buyers offer needs to be deemed reasonable by their lender if they expect to get a loan. A lender will make sure their client isn’t paying more than fair market value for the area and type of property. The bank will not loan funds for a property in which they cannot foreseeably recover their money if they have to foreclose. Thus, the bank will order and require the buyer to pay for the professional opinion of a licensed appraiser. If the appraiser finds the fair market value to be equal to or less than the price offered, everything is terrific.
Dealing with a Low Appraisal
Everyone sweats during the appraisal process. As I write this article, my young buyers and I are still sweating, but I feel pretty confident.
With buyer’s vying for exceptional homes and some real estate agents conceiving situations that create buying frenzies for their sellers, we have to deal with more and more appraisals coming in below contract price. If an appraisal comes in low there are two basic options:
- The seller needs to lower their contract price to the appraisal amount, or
- The buyer needs to bring more money to the table.
Put yourself in the buyer’s shoes. Realistically, why would a buyer knowingly pay more for a house than their bank says it’s worth? There could be valid reasons, but normally it wouldn’t be a wise decision.
Based on the opinion of the appraiser, at least for the next several months, you know what fair market value is for your house. You could move on and hope the next buyer’s appraiser would come in higher, but for certain types of loans, like FHA, the value is locked in for some months. You’d have to eliminate all FHA buyers from your possible buyer pool, and in certain price ranges that would be a substantial reduction. You can always appeal an appraisal, but it is a long process, you might not win, and by the time a decision was made the buyer may have moved on.
As a seller, you have one more possible recourse, and that would be to find a cash buyer. An appraisal isn’t necessary unless a lender is involved and many buyers with cash will waive it. In return for doing so, though, they may expect you to cut the price. Their reasoning is that cash transactions are usually less stressful and close in a much shorter time. So, if they are expecting a deal that may bring you back down to the appraised value.
Since the buyer can cancel a real estate contract if the appraisal comes in lower than the price they have agreed to pay, the only real risk to them is losing the home because you decide not to lower the price and pull it off the market. Of course, they would have to begin their search again.
Occasionally, a buyer’s lender will order an appraisal immediately after contracts are signed, but in most cases, they will wait to see if inspections and repairs are negotiated amicably before having their clients spend $500 or more for an appraisal. Thus, the appraisal results may not be available until several weeks into the process, and both you and the buyer may feel locked in because of different buying/selling commitments you’ve made by this time. That brings us back to the fact that you may have to lower your selling price.
Of course, you as the seller want to walk away with the most money in your pocket, and no, you wouldn’t accept a low offer just because your house might not appraise high enough. But a great Realtor® will forewarn their buyer what can happen in a bidding war, or warn their seller that they might have to lower their price based on appraisal values. The next Seller Question is Who decides what the asking price should be for my house? In that article, I will discuss some indicators to watch for that might suggest an agent had ulterior motives when trying to list your house, and might not have your best interest at heart. I want you to hire a great Realtor® to help you sell your house.
The opinions expressed in these articles are not necessarily those of Executive Life Magazine or the ACA Business Club. Answers are general in nature and do not apply to particular cases.