Selling Your Home – 2 Times?

A recent post on “The Home Story”, a site published by Fannie Mae, explained the difference between the price a seller may get for their home and the value an appraiser may assign the property.

The Sales Price

Naturally, most sellers want to maximize the price they get for their home. However, the price they set may not be indicative of other comparable homes in the neighborhood. The Fannie Mae article states:

“People tend to view their homes emotionally, and that can become quickly apparent when they decide to sell.”

A seller can set an asking price and actually have a buyer agree to purchase the home for that price. However, that value may not align with what most buyers are willing to pay. For example, one person can view a property, determine it is exactly what they are looking for and well worth the asking price, whereas another person could look at the same property and feel the asking price is too high.

Steven Corbin, Director of Valuation in Fannie Mae’s CPM Real Estate division gives an example:

“Someone may have driven by the property countless times, and they really want to live in that house. So in reality they may overbid for that property. This would be a situation where the actions of a specific buyer do not represent the actions of a typical buyer.”

The Appraised Value (or Market Value)

Fannie Mae explains what they look for when appraising a house:

“When a contract is established on a property, an appraised value is determined by a professional real estate appraiser. The appraiser works on the lender’s behalf to determine that value by taking many factors into consideration, including the neighborhood, the value of properties of similar size and construction, and even such things as the type of fixtures on the premises and layout of the floor plan.”

The Challenge – When Sales Price & Appraisal Value are Different

If the appraiser comes in with a value that is below the agreed upon sales price, the lending institution may not approve the loan for the full amount the buyer needs to complete the transaction.

Quicken Loans releases a Home Price Perception Index (HPPI) that quantifies the difference between what sellers believe their house to be worth and what appraisers determine the value to be.

Currently, there is approximately a 2% difference between seller pricing and appraised value. On a $250,000 sale, that’s a $5,000 difference. Lenders will only lend on appraised value or purchase price – whichever is less.  This can be a deal breaker for potential buyers and can prevent the transaction form proceeding to a successful close.

Bottom Line

In essence, houses listed for sale have to be sold twice; once to a prospective buyer and then to the lender (through the lender’s appraisal). In a housing market where supply is low and demand is high, home values can increase rapidly. A major challenge in such a market is the appraisal. If prices are rising quickly, it is difficult for an appraiser to find adequate comparable sales (similar houses in the neighborhood that closed recently) to substantiate the sales price for the lender.

With escalating prices, the second sale might be even more difficult than the first. Let’s discuss the market in your neighborhood to determine the best listing price for your home.