Who are All These Inspectors?
The home buying and selling process is a learning experience. Aside from open houses and showing appointments, professionals will be coming into a home to ask the same questions at least three times. A Real Estate Agent will come in and create a CMA in order to help price a home. A Home Inspector will look into the state and health of the home. Finally, and crucially, an Appraiser will evaluate a home for the bank. The visits can feel remarkably similar. It can get tedious, however understanding the purpose of each of these inspections can help set expectations for the process.
In today’s blog post, we want to cover the difference between Value and Price, who sets those numbers, and how to troubleshoot issues. We also will briefly touch upon the role of the Home Inspector and how it varies from the Agent’s and Appraiser’s roles.
Market Price vs. Market Value
When a seller puts their home on the market, their real estate agent will help them determine a listing price for their home, as close to the expected Market Price as possible. Market Price is the amount of dollars that a reasonable bank-qualified person will pay for a property while fulfilling the seller’s expectation of value. Market Value is a little bit different, but closely related. Market Value is an opinion of what a property will sell for in a competitive market given the amenities and features a property has. Real estate buyers and sellers decide on an appropriate Market Price. Appraisers decide on an appropriate Market Value.
The reason these two things exist is that price and value are both subjective. Price tends to be determined by people who are interested in a home for very personal reasons. Value is determined by a third party professional who has no vested interest in the sale. Banks rely on appraisers to inform them about what an average buyer would pay for the property in question. If the new buyer, who absolutely loves a home, is willing to pay more than the average buyer, according to the appraiser, there is inevitably an issue. Banks want to see that the average buyer would pay the amount they have loaned for the purchase in the event of default.
What Happens when the Appraisal Value comes in Lower than the Market Price?
Since a bank wants to make sure that their investment is a low risk one, they are going to rely on the appraisal value when they approve a loan. If the agreed upon purchase price is more than the appraisal value, there are a couple of things that buyers and sellers can do to take the transaction to close.
One thing they can do is fill the hole with cash. Buyers can simply put more money down to cover the difference, if they have it. If that can’t happen, then the sellers can bring the price down to either match the appraisal value, or match a value that the buyers can afford given the current appraisal. If those options don’t work, the buyer can order a second appraisal, with the understanding that appraisals cost between $300 and $400. There is no guarantee that the second appraiser will raise the appraisal value. Sellers can also make repairs to the home before a second appraisal in an attempt to bring the value up.
How Common is this Problem?
In a sellers market with low inventory, in most of Massachusetts, this problem can occur because there is so much competition for good properties. Competitive qualified buyers can make offers that are much higher than the listing price in an effort to squash the other offers. While this can be a very good thing for a seller, the appraisal can quickly put the kibosh on the deal. Sometimes the variance is simply too great for buyers to make up, and the deal is at risk of falling through.
Sometimes, agents and appraisers simply disagree about the value of a property. When an agent helps a seller set the price for their property, they create a Comparative Market Analysis and look at the current listed and recently sold properties in the area. They compare the features of properties including neighborhood, available amenities, age, size and style. Appraisers use a similar approach. More often than not, the appraisal will come back close to what the agent predicted. Every now and then though, an appraiser will give more weight to a property feature than an agent did, or vice versa, and the numbers won’t match up. When a seller has their home appraised during the sales process, their agent should be there with the appraiser. The agent should have a CMA prepared for the appraiser and should be ready to list any recent upgrades. The more information an agent and seller can offer the appraiser about how they determined price, the more likely the appraiser will agree.
When the value is very close to the listing price, there is one more issue that can cause a mismatch. Buyers who ask for their closing costs to be rolled into their mortgage may end up overshooting the appraised value. When this happens, either the buyer needs to find another way to cover closing costs, or they need to renegotiate sales price such that the final number ends up at the appraised value.
Appraisers and Agents are not Home Inspectors
Home Inspectors generally come look at the home before an appraiser, once an offer is accepted. Their opinion has no bearing on the value of the home. A home inspector looks for areas that need repair in order to furnish information to the buyer about the condition of the property. Buyers are entitled to these inspections and the information they contain such that they can plan on how much money it will cost them to maintain or improve the condition of a home. Sometimes, a buyer may waive their right to inspection, but only in rare cases. It is uncommon for an agent to recommend this course of action. Home inspectors may find real material defect in a home that was previously unknown by all parties. In that case, buyers may ask to renegotiate the deal, but a seller can say no. At the same opportunity, buyers can rescind their offer to purchase a house given the new information. Buyers also may simply request repairs before closing and leave the price alone. An appraiser is not looking for the same things as a home inspector. An appraiser looks at how the house does within its market, the home inspector is looking at specific issues in a specific house.
Take it in Stride
In the end, selling or buying a home is likely to be at least a month of your time. It can feel taxing and tedious to have people coming through your home on a routine basis. Each the Home Inspector, the Appraiser, and the Real estate Agent will ask very similar questions about a home, but their goals are slightly different. Remember that each person who comes through your home offers a different piece of the puzzle. The puzzle pieces may all be the same color, but they fit in very specific places to ensure a smooth closing. The investment of money and time in the process is well worth it, especially if you surround yourself with reliable and knowledgeable Real Estate Professionals. When you select an Agent, make sure that they have experience to commensurate with your transaction.
At Coastal Point Properties, each of our Agents have years of Residential Real Estate experience. No matter what your needs, we have an expert who can help you. With our knowledge and industry network we will be able to help foresee any issues with the inspection or appraisal process, we will be able to negotiate any repairs or price changes to satisfy all parties, and we will help bring your transaction to a smooth close.
Call us today if you are considering buying or selling a home. Check out our post next month for a more in depth look at Home Inspections!