What Is My Home Worth
Think it’s only the buyer and seller who need to agree on a purchase price in a real estate transaction? Not so fast. If the buyer applies for a mortgage, the bank will need to assess the property’s market value before making a loan.
Let’s say an offer is made on a property for $600,000 but the appraisal comes in at $575,000. What happens when there is a gap between the purchase price and the maximum amount a conventional lender is willing to loan on the property?
There are two basic options, depending on how the contract reads. The buyer can either come up with the difference — in the case above, $25,000 — or the seller can reduce the price.
Usually, the buyer can back out of the purchase altogether. In fact, according to Elina Grugier-Bell, assistant vice president and manager of the First Hawaiian Bank’s Mortgage Banking Department, appraisals that come in below the sales price are among the top deal breakers in Hawaii. “The bank will lend on the lower of the two — the appraised value or purchase price. In the example above, (that would be) $575,000,” says Grugier-Bell.
Here is a basic explanation of how conventional financing works. The banks are generally willing to lend up to 95 to 97 percent of the value of a home with certain owner-occupant programs, in which case the buyer must provide the remaining 3 to 5 percent in cash. This ratio, known as loan-to-value, gives the bank assurance that the buyer is also personally invested in the purchase and will remain motivated to repay the loan. In some cases, it can be up to 20 percent or more in cash needed to purchase or refinance a property.
Unless it is a cash deal, the success of the transaction often hinges on the “appraised value,” which is a third-party evaluation of the property’s market value.
“The purpose of getting an appraisal is to determine the value and the marketability of the property in the prospective neighborhood and community and to assess the condition of the property/collateral,” says Grugier-Bell. “If it is an investment property, the purpose is to verify the same, as noted, and to determine the market rent for the subject property.”
According to Aaron Young, vice president and chief appraiser at First Hawaiian Bank, the process starts with a visit to the home.
“The valuation process is a systematic procedure employed by the appraiser to derive market value,” says Young. “First, the subject property is physically inspected. Then, three or more comparable sales recently closed and/or located in the same or competitive neighborhoods are used to bracket the value of the property. Listings and sales in escrow are considered in the appraisal process.”
The subject property value can be adjusted upward if it contains features that the comparable property does not. Likewise, downward adjustments can be made if the comparable property has features the subject property lacks.
If you believe your house may not measure up to others in your area, Young says there are ways a seller might boost their home’s value.
“We believe that most buyers like renovated kitchens, baths and a good floor plan,” Young adds. “Minor items include painting and a new roof. However, the homeowner must be careful not to over-improve the property; the cost (of the improvement) does not necessarily correlate to added value.”
Grugier-Bell agrees, and adds that while “having your property in good shape and order is always positive, don’t be in the midst of repairs or redesigning a new kitchen, bathroom, etc. during the appraisal process and always have your improvements to your property permitted.”
Renovations may require the homeowner to use some of the home’s equity to pay for the needed improvements. “Equity lines are the perfect tool to make improvements and repairs and on the owner’s personal timeline,” says Grugier-Bell.
She adds that buyers and sellers should be aware of how an appraisal may affect the transaction.
“For sellers, check with a reputable Realtor® to obtain advice and market pricing information. Buyers, decide upfront before you sign a contract if you want to pay more than the appraised value or not and make sure your real estate agent reflects that in the contract on your behalf. First Hawaiian Bank works closely with the borrower and Realtor when valuation challenges are presented. While we have experienced many cases of lower valuations in past years, we continue to see them today, but in fewer instances. Working to find alternatives that are in the best interest of the borrower is key and very important to the outcome.
So what is your home worth? The answer may depend on who you ask. If you ask a bank appraiser, the amount may be different than if you ask your insurance company to evaluate value.
“The market value, list price, replacement cost, and what a buyer may be willing to pay, may all be different from each other,” says Young. “The market itself is very subjective, because buyers purchase property for various reasons. However, there are commonalities associated with specific properties, which can be quantified. And an appraiser provides a good indicator of what your property is worth in the marketplace.”