What Is Property Value?
Value is a simple word, yet it holds different meanings for each of us. In relationships, books like The 5 Love Languages explain how people value love in unique ways. My love language happens to be Acts of Service, which means my personal goal is to be a person of value to others daily. I value time deeply, for myself and others, and I work to offer information and support that genuinely makes a difference. In a world where time is precious and information is abundant, it surprises me how often real value is overlooked.
But in real estate, value has a very specific meaning. Understanding how property value is determined can be key for buyers, sellers, and homeowners alike. So, how do appraisers actually determine the value of a property?
What Is Appraisal Value in Real Estate?
Appraisal value is the process of comparing a subject property to similar homes that have sold recently within a certain area. Appraisers focus on the “apple-to-apple comparison,” using nearby homes that have recently sold to gauge the subject property’s value. This ensures that home appraisals are grounded in real market data.
During an appraisal, appraisers look at three recent closed property sales, known as comparables or comps. These comps are selected based on:
- Location: Homes that are geographically close to the property.
- Sale Date: Recent sales provide more accurate data.
- Similar Characteristics: Comparables should be similar in size, layout, condition, and features.
The result of this analysis is a precise estimation of the home’s value based on the current real estate market.
How Does an Appraisal Affect Homebuyers?
In a competitive housing market, bidding wars and multiple offers can drive home prices above the list price. For buyers using financing, this can create challenges. When a buyer offers more than the asking price and chooses to waive the appraisal contingency, they are taking on the risk that the appraisal may come in lower than the purchase price. Watch my video where I discuss why it’s important for home buyers to understand the risks of waiving the appraisal contingency.
Why does this matter? Because lenders base financing on the lesser of the two values: the purchase price or the appraised value. If the appraised value is lower than the purchase price, the lender will only finance up to the appraised value. This leaves the buyer to either cover the difference in cash or renegotiate the purchase price.
Challenges of Appraising Property in Low-Inventory Markets
In areas with limited housing inventory, finding a perfect comp can be difficult. This lack of similar home sales can result in a lower appraisal, even in a market where demand is high. For buyers, this can mean unexpected out-of-pocket expenses or challenges in securing financing.
This is why it’s essential to work with experienced real estate agents and lenders who understand the nuances of the appraisal process. They can help you:
- Structure your offer with appraisal considerations in mind.
- Protect your earnest money.
- Navigate the appraisal process to avoid surprises.
How to Prepare for a Home Appraisal
For homeowners looking to sell, understanding how appraisers determine property value can help them prepare. Here are a few tips:
- Make minor repairs: Fixing small issues can improve the perceived condition of the home.
- Highlight upgrades: Provide documentation for any renovations or upgrades that could add value.
- Clean and declutter: A well-presented home can positively impact the appraisal.
Final Thoughts on Home Appraisals
Understanding how appraisers determine property value in real estate can help both buyers and sellers make informed decisions. It can also ensure that your offer is competitive without being risky, and that you’re prepared for any financing challenges that may arise.
In real estate, value is the bridge between dreams and reality—let’s make sure it’s built on a solid foundation. With the right knowledge and guidance, you can navigate the complexities of appraisals and ensure you’re making the best investment possible.