One of the “free samples” of a Realtor’s services we provide to Sellers is the CMA — the Comparative Home Analysis — sometimes referred to as the Competitive Home Analysis. No matter what you call it, the Realtor takes some time to do some research into what a particular home might sell for given current market conditions, location and condition of the home. Lots of factors come into play during the research, not the least of which, is the Realtors personal experience both with the area and in the profession, generally. An experienced Realtor will be pretty close, if not dead on, when determining a recommendation for a selling price.
All that said, Realtors are not appraisers.
I take that back. Some Realtors are appraisers. They may have been appraisers that decided to help people buy and sell houses or they may have just decided on a change in career. Sometimes, Realtors decide to go through the process to get licensed as appraisers, too. However, the vast majority of Realtors are not appraisers. So, even though an experienced Realtor will, through their own research and experience, recommend pricing to a home seller, it is the appraiser that will determine the valuation for the house for the mortgage company the buyer is using.
The Buyer’s Perspective
Everyone knows that home sellers want to sell their homes for the highest possible price (we’re not talking bank owned foreclosures or short sales). We also know that home buyers want to purchase their home for the lowest possible price.Thus, an experienced Realtor working for the buyer will perform a CMA independently so they can advise the home buyer about strategies to structure an attractive offer. Again, the CMA prepared by a Realtor working as a buyer’s agent should be pretty darn close to true market value. What the home buyer offers is a different story.
Regardless of what the home seller and home buyer may agree upon, if the home buyer needs to obtain financing, the mortgage company, bank, or credit union will not (repeat: will not) provide a mortgage to the home buyer for more than the market value of the house as determined by a professional, licensed appraiser.
Many times the appraised value of the home comes in very near the contract price (the price agreed upon by the home seller and home buyer). Sometimes, it comes in higher. Some examples include:
- estate sales — the heirs just want to sell the house and be done with it
- divorces — there may be pressure for one of the parties in the divorce or the courts to sell the property
- job relocation — a home owner may not want a vacant property or the mortgage on home they aren’t living in
- illness — a home owner may need to move into a long term health care facility assisted care facility and need to sell the home to pay for it
One particularly sad reason homes may appraise for more than the contract price is that the home seller has over priced the home initially in the hopes of obtaining a price higher than the market will bear. The house sits on the market for an extended period of time. At some point, the home seller really either needs to sell the house or has just tired of the constant interruptions to their life by potential home buyers. The home seller will then either lower their asking price substantially to attract a home buyer or they will accept a “low ball” offer just to be able to move on.
Mr. Market Calls The Shots
The sad truth about home pricing is that neither the home seller, the home buyer, the Realtor nor the appraiser control the price of the home. The market does. Many economists call this the “invisible hand” — market forces that are not fully understood create the environment for fair value. As much as a home seller wants to sell their home for a high price and as much as a home buyer wants to purchase the same home for a low price, it is the market that determines the price.
That’s why we saw such wild fluctuations in home prices over the last ten years. Home prices went wildly up because, oddly, the market was supporting the price appreciation (due to exotic mortgage products, mostly). Now, market value has fallen because a large number of home buyers can no longer pay their mortgages making huge numbers of homes in distressed condition available for sale at bargain basement prices. Simultaneously, credit has become extremely difficult to obtain reducing the potential home buyer pool even more.
The market has spoken.
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