An appraisal is an opinion of value at a specific time for a specific property. Written by a licensed and unbiased appraiser, this estimation of value serves to protect the interests of buyers and lenders. Buyers don’t want to pay more than a home is worth and lenders want to ensure that the collateral justifies the loan.
But what if you’re the seller? Should you get an appraisal done before listing your home?
To answer that, let’s look at three common problems that can potentially be addressed with an appraisal.
Reason #1 – Armchair Experts
With all the real estate websites out there (Zillow, Trulia, Redfin, etc.), buyers have easier access to information than ever before. While this is extremely convenient for buyers, it does have a downside. Many buyers become “armchair experts” who come up with their own price and their own idea of what your home is worth. In some cases, having an appraisal of your own can justify the price you set.
Reason #2 – Unique Property
Sometimes there’s just not much data available for a home like yours. Custom homes with views and high-end amenities have a thinner sales market—especially at higher price points. If your property is unique, buyers and their agents may not be able to pull the right comps to support your sales price. Even if your listing agent correctly prices the home, having the opinion of an impartial third party appraiser can help eliminate any perceived biases.
Reason #3 – The Red Flag Scenario
When a buyer applies for a loan, their lender requires them to get an appraisal. The bank will only loan on that appraised value. For example, if a buyer is going to buy a house for $1,000,000 and the bank requires a 20% down payment, that’s an 80% loan-to-value (LTV). In this case, the buyer is hoping that the home appraises for $1,000,000 because the bank will then loan them 80% of the appraised value ($800,000), leaving them with a down payment of $200,000. If, for some reason, the appraisal comes in lower (let’s say $900,000), the bank will still only loan the buyer 80% ($720,000). In this case, the buyer has to not only come up with the $200,000 down payment for the seller, but also an extra $80,000 out of pocket—an unwelcome surprise.
In scenarios where the buyer is able to leave a bigger down payment, it’s common for the seller to think, “They’re putting down plenty of money. The appraisal really doesn’t matter.” Sure, the buyer might still have the money to buy the house, but a low appraisal still causes problems. If the appraisal comes in below value, then it’s a red flag for the buyer. No buyer wants to be the shmuck that overpaid for their house. Unwelcome surprises can sometimes be eliminated ahead of time by getting an appraisal done early on.
Is an Appraisal Right for You?
Though all three of the above scenarios could potentially benefit from an appraisal, an appraisal is not a one-size-fits-all solution. Not every home should get appraised before it goes on the market. Work closely with your real estate agent to come up with the best strategy for your particular situation. If you’re selling a unique property, you should at least have a conversation about getting an appraisal done—regardless of how far along you are in the selling process.
For example, we had one home priced higher than all the recent sales in the neighborhood because it was fully remodeled. It looked 20 years old from the outside, but the inside was as custom it could be. We had a lot of interested buyers, but they had a hard time justifying the price. Once we got an appraisal done, we were able to share that with the buyers, which made them feel comfortable pulling the trigger and paying the seller’s price for the house.
We also had a deal recently where we went into contract at $1,350,000. The buyer’s appraisal came in at $1,300,000. Upon reviewing their appraisal, we found that there were some adjustments that weren’t taken into account. This property had nearly $400,000 in upgrades. The seller ended up paying for a second appraisal, which came in at $1,370,000. With that appraisal in hand, the buyer felt comfortable paying $1,350,000. The lesson here? Even if you sell your home and it goes under contract at a certain price, the buyer’s appraiser can still come along and ruin the whole deal.
We at the Rob Jensen Company specialize in unique situations like these. We make sure that we not only sell at the highest price, but that the deal closes at the highest price. If you have any questions or want to know if an appraisal might be right for you before putting your home on the market, reach out to us. We’d be happy to help!