help me understand listing price vs. appraised value

[Anonymous]

I don't understand how an appraisal is done. I think it takes into consideration the nearby sales prices (or sales listings?) and the house itself... right?

So is it common (or uncommon) for an appraisal to be less than a home was listed for (and likely) what a contract was agreed upon - which then may affect the amount the mortgage is written for?
When writing a contract for a house, when dependent on a mortgage like many people are, how do you know the appraisal will come in equal to or above the contract amount? (I worry about not getting approved for the amount of a house.)

Thanks.

[Anonymous]

Theoretically, the listing price should take into account the appraised value. But, many times it doesn't for one reason or another. I've heard from apprasiers that the top thing they look at is comperable properties that have SOLD within the last 3, 6 and/or 12 months.

As a buyer, it is possible the house couldn't appraise for the agreed upon price. In that case, the buyer and seller can try to renogiate price. But, unless a house is way under or over priced, appraisals by the mortgage company have a tendency to come in right around the contract price. That is what happened with both the house we sold and the one we bought this year.

[Anonymous]

That's why a good buyer's agent who's protecting your interests will include an appraisal contingency in your contract. It covers just the sort of situation you outlined -- if your offer is for 500k but the appraisal (and thus mortgage offer) comes in at 450k, you aren't on the hook to come up with the extra 50k. You can either try to renegotiate with the sellers or simply walk away with your earnest money intact.

[Anonymous]

Certain houses tend to go for above the appraised value- in the mid-Atlantic, colonials and craftsmen are favored more. (Split-level, rambler, tudor, etc are favored less.)

[Anonymous]

Residential appraisals are based on comparable sales in the neighborhood and the prices of those homes are adjusted to reflect the value of your home. Because each piece of real estate is theoretically a unique property and because the market is imperfect since there is only one buyer for each home, the appraisal is not a perfect reflection of the market, but its the best that can be done. When the appraisal doesn't come out as high as the contract price, you have to look at why. Are there similar homes in the neighborhood that are listing for less money? Did the seller offer some special deal with respect to points or financing to get a higher price? The appraiser is attempting to derive the "most probable price" that this home would sell for. That isn't always the actual price it is selling for. It should be the same, but its not always. Additionally, it can be difficult for appraisers to reflect changes in the market. In an upward-trending market, the sales they are using may be lower. In a declining market, they could be higher. The appraiser is expected to adjust for changes in market conditions, but the adjustments might not be as accurate as they should be. Additionally, banks like to be conservative in their lending these days. They may only hire appraisers who tend to be more conservative in their valuations.

[Anonymous]

Ideally, the appraisal and sold price of the home will be very close or the same. A good seller's realtor will essentially appraise the home and suggest a list price that is very close to the appraisal estimate.

If your appraisal comes in far higher than the closing price, you are golden. If it comes in far lower, the bank will not want to give you a mortgage for it.

[Anonymous]

I'm in Finance, and I used to work in real estate development. There's a lot of subjectivity built into an appraisal. Ideally you have a lot of comps to work with, but there can be a lot of variability in even very similar homes in the same neighborhood. I think in general, if the appraising bank wants to get the deal done, they have wiggle room in determining value. You can start at what the neighboring house sold for, then add X for the extra bathroom and Y for a more desirable lot, until you get to around the listing price, and there generally aren't agreed-upon exact amounts that this feature or that is worth. I think that tax assessed value can be a good starting point for deciding whether a listing price is appropriate or not. If all the homes in a general area are selling at 110% of the tax assessed value and you're looking at home that is selling at 125% of its tax-assessed value, I'd be more concerned about that appraisal coming in at a high-enough value than I would about a home selling at 105-115% of tax assessment. it's not a perfect relationship, but it can be an indicator. A good realtor should help you price your home at something that would be a realistic appraisal amount, and a good seller should be careful not to let their emotions get in the way of pricing their house correctly.