Hey, have you heard? The real estate market is nuts right now. Bidding wars up the wazoo, all cash offers undercutting the mere mortals right and left. (Seriously, what are those folks sleeping on now that they've emptied their mattresses of all their money?) In addition to ratcheting up the stress and busting the budgets of buyers, it's added an interesting wrinkle to the matter of figuring out how much to offer for a house. In the good old days (last year), you'd look at the comps. That is, recent sales of comparable houses in the neighborhood of the house you have your eye on. Comparable means houses of a similar
-- number of bedrooms and bathrooms
-- quality of amenities
Considering all of that, and factoring in other considerations like how long the house has been on the market, how motivated both buyer and seller are, and what else is on the market, you could determine not just what a house is worth, but how much above or below that your offer should be. It was a simpler time. Now, with home prices steadily rising, a house might also ultimately go under contract at a price considerably above what the comps indicate as its real value. Which brings us to appraisals.
An appraisal is what your lender performs once a house is under contract to assure itself that it's making a good investment and you aren't agreeing to wildly overpay for it. Which means that appraisals don't apply to all-cash buyers, who are free to overpay as wildly as their bank accounts/mattresses will allow. But for those who will use a mortgage to buy a home, here are some of the things an appraiser will look at:
-- Structural condition: the appraiser should give the home a thorough going over, from foundation to roof, to make sure the house is in sound shape.
-- Interior: the walls, the appliances, the floors, the plumbing, and signs of neglect will all get checked out (but remember that it's not a substitute for a full inspection).
-- Amenities: desirable features like fireplaces, pools, and security systems all affect the price of a home, and they're considered too.
-- Location: It's not just the general neighborhood under consideration, but also the nitty gritty that can play a role. Is the house on a corner lot? Is it one of the few single family homes on a street with a bunch of apartment buildings?
--Comps!: Yep, the appraiser looks at those, too, to get a sense of what the market thinks houses like yours are worth.
The appraiser will factor all that together and determine the value of your future home. And if that number comes in higher than your agreed-on price? Congratulations, you expert dealmaker, you. But if it comes in a lot lower, you've got a bit of a problem on your hands, and it's something that's happening more and more as bidding wars drive prices up way above comps. You have a few options, though. Your lender should have an appraisal dispute process that you can follow, if you think the appraiser was way off. You could also take the appraisal to the seller and renegotiate the price--after all, if your lender won't agree to the current price, chances are the next buyer's bank won't either. If you're able, you could also make a bigger down payment, reducing the bank's risk (and their objection to the loan).
Comps and appraisals are as much art as science, but the idea behind them is to make sure you pay a fair price for your home, and neither you nor the bank gets stuck with a money loser. But there's also the mantra of many an agent to consider: a house is worth whatever someone's willing to pay for it, comps be damned.
· Curbed University 2013 [Curbed LA]