Understanding Market Value, Home Value, and Appraisals
Establishing a home’s market value is equally important to buyers, sellers, lenders, and real estate professionals so that transactions can proceed quickly and efficiently. Whether you are buying or selling a home, your real estate professional can give you a snapshot of the local market known as the competitive or comparative market analysis or CMA. CMAs are generated from the multiple listing service and tax data. CMAs are convenient reports that help sellers choose a listing price and help buyers make competitive offers on a given home. CMAs vary greatly depending on the search parameters like the type of home, detached vs. attached garage, zip code, number of bedrooms, baths, living areas, square footage, and numerous other search criteria. CMA's also tell you which homes have recently sold (six months, three months, one month, etc.) and which homes are currently on the market.
Although the CMA is used to help determine current market value, it does not establish the seller’s home value. The CMA is merely a tool to help the seller obtain information about the local market. This information helps the seller better determine a listing price. Once the home is listed on the open market, a buyer makes an offer, usually based in part on a CMA the buyer’s agent has prepared. CMAs can help buyers better understand the local market as well as sellers. If the buyer is receiving financing through a bank, the bank will order an appraisal. Unlike the CMA, a bank appraisal is a professional determination of a home's value. It is performed by a licensed appraiser, using guidelines established by the Federal Housing Finance Agency, which regulates federal housing loan guarantors such as FHA, VA, and housing loan purchasers Fannie Mae and Freddie Mac.
An Appraisal is a comprehensive look at a home’s location, condition, and eligibility for federal guarantees. For example, a home that doesn’t meet safety requirements such as handrails on steps will not be eligible for FHA or VA loans until the handrail is installed or repaired. Appraisers use the same data that real estate professionals use in their market research to find comparable homes. Appraisers are members of the MLS, but they also have additional guidelines from the bank to follow that minimize risk to the bank. They may take off value for slow-moving markets, or markets with high rates of foreclosures. If prices are falling, the appraiser takes the number of days a home has been on the market far more conservatively. When the appraisal is finished, the bank makes the decision to fund the loan, or it may require the seller to repair certain items and show proof that the repairs have been made before letting the loan proceed. If the loan doesn’t meet lending guidelines, the bank will decline the loan. Despite stricter lending and appraisal standards, nearly 85 percent of buyers’ loan applications go through to closing. One reason for that is real estate agents are preparing CMAs that are better tuned to lending standards.