Buy My First Home

In today’s market there are very few properties on the market and plenty of buyers.  This holds true, most especially in the first time buyer market.  If it is listed below $300,000 it will most likely have many offers.  As many as fifteen offers are not unusual if the property is a nice property that is priced at market value.

The seller wants to get the most out of his property, of course. The seller grins like crazy at the multiple offers.  With visions of dollar signs the seller anticipates selling for tens of thousands more than his agent recommended he list at.  It must be understood that the property must appraise for the agreed upon sales price.  If it does not appraise at that price the buyer, attempting to purchase at the higher price, has to either:

a) back out of the sale

b) pay the difference between what the home appraised for and what the buyer offered or

c) the seller has to agree to lower the price to the appraised value

More often than not the buyer does not have the wherewithal to pay the difference so it is, most often, a choice between getting the seller to lower the price or backing out.  Seller’s can be most upset, and frustrated, at this situation.

It used to be a definition (in real estate) that “a property is worth what a willing and able buyer is willing to pay”.  Currently that is not the case.  In fact President Bush stated on national television about one year ago that any appraiser found to be padding the value (allowing an appraisal without valid comparable sales to support it) would be prosecuted to the full extent of the law.  That message has reverberated through the appraisal world and many appraisers are now extremely, sometimes overly, cautious.

While most appraisers were very honest and were not doing the above unethical activity there were a few, a minority, that were and that has now resulted in threat to the majority. Of course the first to be cautious were the ones that were not doing that anyway, the ethical appraisers! Of course the President was referring to government related loans like Veterans Administration loans or the Housing and Urban Development loans but the effect has spread far beyond. 

In short, now, the definition is, in the real day to day world, “a property is worth what the bank appraises it for” and not a penny more!

Example:   1234 Green St.  sold 30 days ago for $275,000.  It was a two bedroom with one bathroom and was 1000 square feet on a 6000 square foot lot.

1245 Green Street is exactly the same and is now for sale at $290,000.  Unless there are improvements to support the difference…it will not appraise for $290,000.  It would need to have upgrades like maybe a pool ($10,000 value) and maybe a great view ($5000 value).  If it is the same shape, age and condition as 1234 it will appraise for the same $275,000. 

So you see no matter how much the seller thinks it should be worth more, it won’t be unless it has the upgrades that justify the increase.

On rare occasions the buyer has a large down payment or is paying cash in which case there is no appraisal required.  The buyer in that position can usually leave the competing offers in the dust.  Other buyers offering $10,000 or more over the list price do not get an acceptance.  Because the smart agent knows exactly what it will appraise for and takes the cash offer which usually does not depend on an appraisal.

A common buyer’s ploy in today’s market is to go ahead and make an offer that is much higher than the seller is asking.  The buyer’s agent has checked the comparable sales and knows it will not appraise for what the buyer is offering.  It blows away all competing offers and then when it does not appraise the buyer looks to the seller to lower the price back to what it was originally listed at. 

If, in the above scenario, the listing agent is on top of it, the listing agent knows if there are upgrades to justify the amount being offered.  A sharp agent, knowing the value of the upgrades, will show the upgrades to the appraiser.  It has really happened that a buyer BACKED out when realizing the house was worth what he offered and his strategy did not work!

The bottom line when pricing your home for sale or accepting an offer from a buyer, you must have upgrades that justify any increase in value over and above the most recent comparable sale in the neighborhood.  A comparable sale would be one that is the same or similar age, in square footage (both home and lot) and amenities and in the same neighborhood or area.

This is not as simple as it sounds.  If we look at three homes being sold on the same block and they are comparable in lot size, age, and square footage the comparison in an appraisal would go like this:

House #1 (the house now  being appraised) has a pool and spa.  House #2, sold last week, does not have a pool and spa. House #3, sold two weeks ago, has a pool but no spa.  The sales price of the two that sold are noted and used as a basis in working out what #1 is worth. In the case of #1 the value for pool and spa would be added to the price #2 sold for.  When compared to #3 value would not be added for a pool because they both already have a pool so they are already comparable.  However, #3 did not have a spa so value would be added to the sales price of #3 for the spa.  It can get pretty complicated with subtractions made for bad things like extremely worn out property or amenities or being next to railroads, etc.

Go for the gusto in any case.  You just might get it, but be aware that the appraiser has to work up the value for the bank and it must be based on real tangible “sold’” (not for sale, but actually sold) properties.

Tomi Lyn Bowling

01145550 Calif Broker’s license #

Tomi Lyn is experienced in all areas of Southern California