During the course of selling or buying real estate, your realtor can provide you with property value information, typically called a “market analysis”.
As a Buyer, the comparable properties you and your realtor will evaluate to determine your willingness to purchase a property at a given price will likely come from similar properties that have recently sold in the MLS (Multiple Listing Service), as well as from properties that are “active” or “pending” on the market that you have reviewed and/or viewed during the course of your search.
As a Seller, you and your realtor will evaluate properties to determine at what price you will “list” and opt to sell your home. That decision should be based on similar properties that have recently “sold” in your area. It will also be beneficial to see what homes are in escrow at the time, and those that are “active” on the market as well. Active and pending listings can illustrate in what direction the market is going (ie. are prices and “days on market” illustrating an upward or downward trend in the marketplace?).
On the other hand, a buyer or seller can opt to purchase an appraisal by a licensed appraiser in the area. An appraisal is an opinion of market value by a licensed appraiser. An appraisal will also use comparable market sales for the property being sold or purchased (“subject property”). However, an appraiser uses additional information in order to come up with the most accurate market value. They will use adjustments to comparable properties (a judgment call based on pricing and trends in the applicable market). Adjustments will be based on a statistical analysis of market changes taking place in the area, as well as values for differences in features, amenities, size, etc. of the comparable properties. Important guidelines appraisers typically adhere to include: distance from subject property, age, size/square footage (basements and “livable square footage with no interior access may be calculated differently than “above ground” square footage), bedroom/bathroom count, and sale date (comparables sold within 6 months of the subject executed contract date are preferable). Please note that not all amenities of a home increase its “value”. Some lead to desirability and ease of selling but not necessarily to an increased market price.
When a Buyer is obtaining a loan to purchase a property, an appraisal will be required by their lender. The Arizona Association of Realtor’s purchase contracts (contracts used by member realtors) provide that the Buyer’s obligation to complete the sale (when obtaining a loan) is contingent on an appraisal of the property acceptable to the lender for at least sales price (some loan programs will also require the appraiser to “inspect” the property when appraising and can require seller repairs prior to closing–discuss your loan program with your lender and/or realtor for appraisal requirements specific to your loan program). When a property appraisal comes in at less than sales price, a Buyer will oftentimes negotiate with the Seller to lower the price to the appraised value. A complaint Sellers have with the appraisal process is that many lenders will not order the appraisal for the Borrower/Buyer until after the Buyer’s inspection period is completed, so that the Buyer does not incur additional expense should inspection results not be satisfactory. A Seller may want to consider negotiating up front a specific time period in which the Buyer must order the appraisal in order to be assured that there will not be a “surprise” close to the end of the transaction.
A Buyer paying cash can also have an appraisal during their inspection period if they would like to better assure themselves of market value. When choosing to have an appraisal completed during the inspection period, a Buyer would be well advised to make sure an appraisal can be completed during the required time period. Appraisers tend to be scheduled out several weeks, and unless the cash Buyer has an appraisal contingency negotiated in the purchase contract, a low appraisal after the inspection period would likely not give the Buyer leverage in negotiating the price of the home.
When selling a property, sellers most often opt to base their “list” and consequent “sale” price on mls comparables provided by their Realtor. Markets are cyclical in nature and go up and also down. If a Seller is concerned about the pricing of their home, either due to the lack of comparable sales, or their particular market place, it may be to a Seller’s advantage to pay for an appraisal. That being said, please keep in mind that an appraisal is an “opinion” of value at the particular time in which it was completed. It cannot be used by a Buyer obtaining their loan (their lender will need to order an appraisal through their own system), nor will the value necessarily be the same 6 or 12 months down the road. A Seller should have an appraisal completed merely for their own peace of mind in determining pricing for their home.
Always discuss your concerns of valuation with your Realtor, and employ the method of value determination that will best suit your needs and satisfy you as to the the home’s market value.