An appraisal
is used to determine the home's "Fair Market Value"
In the real world,
very few individuals order appraisal reports to establish an
offering price or to substantiate a purchase price. At the point
that an offer to purchase (in a typical residential transaction)
is made, the price has been set by other parties, not the purchaser.
The price has been determined by the seller, who wishes to obtain
the highest price possible, or the agent, who receives a percentage
of the price as compensation and often represents the seller
in the transaction.
The real estate agent
will typically perform a comparative market analysis (CMA).
The appraisal laws in most states allow real estate agents to
perform CMAs without an appraiser's license or certification.
A CMA is a necessary part of the agent's preparation for a listing
and consists of examining sales of properties in the area to
arrive at a listing price. The reliability of the CMA depends
upon the agent's experience and the characteristics of the property.
The agent will suggest a selling price to the seller based upon
the analysis. However, neither the seller nor the agent are
bound by the results of the analysis, and the agent is not required
to follow any formal procedure in completing the CMA. If a seller
wishes to list the property at a price higher than the price
suggested by the agent, then the agent may be forced to accept
the listing at that price or risk losing a commission.
Purchasers believe
that they are getting a good deal if they make an offer lower
than the listed price. But how far above the market value was
the property listed? 10%, 15%, maybe even 20% above the fair
market value? A negotiated price of 10% less than the listed
price on a property that was listed at 20% above its value is
not a bargain. The agent cannot tell the purchaser that the
offered price is higher than the value, or even higher than
their own CMA. In most states, they must submit the offer to
the seller.
The seller of a property
may want to order an appraisal before listing the property.
Of course, the cost of the appraisal is always a deterrent,
especially if the seller knows that a buyer will pay for it
when applying for a loan. But the appraisal is often justified.
The seller could lose a sale if the property appraised for less
than the sale price when appraised by the appraiser.
Then, after thorough
analysis of all general and specific data gathered from the
market, a final estimate or opinion of value is correlated.
When To Order An Appraisal
