While this controversy is of a political nature and not typically relevant to homeowners outside of their tax bill, it does underscore the indisputable fact that the price tag placed on your house carries great importance, in terms of everything from taxes to loan opportunities to how much to ask or pay for a home on the market.
In the simplest of terms, a home's "market value" is based on the perception of the buyer. No matter how much your love for your house inflates its value in your mind, the real value is the amount of money the market is willing to pay for the property. Hence, market value. The "appraised" value is the unbiased value of the property as determined by a bank or lending institution, a studied evaluation required with every transaction, whether it's a sale, re-financing or any other loan opportunity that hinges on the house's estimated worth.
On some occasions -- especially in a situation with multiple buyers or in a hot market such as Uptown -- offers made on houses will sometimes be higher than the original listing price. Other times, buyers may fall in love with a house so much that they are willing to risk that it might not appraise at the purchase price. Regardless of the reason, it is a rare occasion when property appraisals equal that of market value.
The reason: appraisals are performed for lenders so that they can justify the sales when valuing it as collateral for a mortgage loan. With appraisals, most credibility is given to historical data or comparative sales (which are sales that have closed in the last four to six months), called "comps" by those in real estate. A Comparative Market Analysis (CMA) is the formula used to derive your home's value.
Given the recent sustained increase in local real estate prices, what happens when a buyer knowingly bids so high that he risks the appraisal coming in too low? If you are a seller caught in this situation, you may want to prepare by making it clear that appraised value is not a contingency of the sale. You are trying to prevent an offer that almost automatically disqualifies buyers with minimal down payments.
Why? Because a low appraisal value will almost always affect the ability to qualify for the loan if the bank doesn't feel that the value is high enough to justify the mortgage. Lenders typically base a loan amount on either the appraised value or the purchase price (whichever is less). If a buyer is applying for a 10 percent-down mortgage and the appraisal comes in too low, the loan amount will be calculated based on the appraised value. In this example, the required down payment would most likely be 10 percent of the appraised value, plus the difference between the appraised value and the purchase price. If the buyer does not have the additional cash available, or is "surprised" by the low appraisal, the transaction is in jeopardy.
So before you accept that super high offer for your house, you might want to make sure that the buyer has enough cash available to make a larger down payment if necessary. If you are the buyer and you absolutely must have the home, even at a higher price, you should always be prepared for the possibility that you may have to make a larger down payment than anticipated.
"It's especially important when you're buying a house that you're not paying too much," says Michael Toso, a local appraiser with his own company, Michael Toso & Associates. "The average person may not be that knowledgeable about the market, especially somebody from out of town. That's why lenders require an appraisal be done."
Toso and all other appraisers are state-certified and required to take continuing-education courses to make sure they stay abreast of the latest information and trends. These regulations help ensure that appraisers are as uniform as possible in what many in the industry admit is an extremely valuable opinion.
Toso cites a recent example of an out-of-town investor looking to purchase a Gentilly house. The investor was nearing purchase when the appraisal revealed the selling price was $20,000 over market value. "It's a good thing he had an appraisal done," Toso says.
"When a house is way over-valued, it's kind of surprising for people and they can get upset with us," Toso says. "But then they realize we're saving them a lot of money. We don't make these numbers up."
To determine these numbers, appraisers first look at the recent sale prices of neighboring comps of similar design. Appraisers also figure in -- and ask for in writing -- everything from the last time the electrical wiring and plumbing were updated, termite contracts, and the number of bedrooms, renovations and upgrades.
"We use three comparables for most deals, but sometimes as many as four or five," Toso says.
Though the recent up tick by the Federal Reserve of interest rates has slowed market activity, Toso said last year was his busiest since he began appraising in 1991. The reason? Refinancing, with homeowners taking advantage of historic low interest rates to lower their monthly note, to earn lines of credit from money lent on the equity built up in their home, or even to access cash for home improvements and vacations. "With interest rates 5.5 percent, you're looking for an excuse to borrow money," Toso says.
"Absolutely," agrees Clay Colton, a mortgage consultant with America's Mortgage Resource. Colton says local homeowners are taking advantage of a sweet combination of rapidly rising property values and low interest rates to access inviting financial opportunities. "Knowing the value of your home relative to the balance on your mortgage lets you know how much equity you've built up, equity you can use to pull out cash to make home improvements, make a purchase, to do whatever you want, really," Colton says.
With a home equity line of credit (HELOC) loan, "you can pull money out like it's a checking account," he says. Typically, a house loan for many years uses note payments to pay off the interest -- the bank wants its money back first -- but eventually payments go toward principal on the house. In accordance with federal law, once payments exceed 20 percent of the home's value, the homeowner is no longer required to pay mortgage insurance -- a fee adding a non-deductible monthly payment of $100 for a $150,000 house.
Reaching that all-important 20 percent threshold can happen with a reappraisal of a home that has increased in value (Orleans Parish properties appreciate at more than 5 percent annually). "With a 30-year, fixed-rate mortgage, you're not going to pay down to 80 percent until way down the road," Colton says. "But if you're house reappraises for a value that brings you there, you might be able to drop your mortgage insurance, obtain a HELOC and refinance for better terms."
"Lenders like doing home equity loans," says Wade Halstead, a Realtor in Prudential Gardner's Garden District office specializing in historic homes. "It's very secure, considering that -- barring catastrophe -- the house is always going to be there."
"The best way to start working on determining the value of your home is the comparative market analysis," Halstead says. "Get with your agent, describe your home, have them perform a simple on-site analysis, and with their research, you get a good educated guess as to what your home's market value is."
Halstead adds that homeowners are required to fill out a disclosure form about the home's condition. "For every component of your house, there's a question about it," Halstead says of the disclosure. "A refinance is pretty similar to that. The lending institution will send in an appraiser. They'll look at the comps and determine the value. If your house is valued at $200,000 and you've paid $75,000, then you have $125,000 in equity and your loan is based on that."
Such a loan has increased value for a homeowner if they purchased the house for $150,000 or less, with certain areas of New Orleans in recent years seeing such huge leaps in value. Because appraisers determine such values, their role in real estate is a crucial, and often under-stated, one.
"No lender will allow an appraiser that's not certified," Halstead says. "It's very thorough training. The state certifies them. You have to take education requirements, be tested, apprentice for a long time and spend a certain length of time on the job." But the people behind a house's determined value are important for an obvious reason. "Real estate is the number one way wealth is transferred in this country," Halstead says. "So obviously your property value is important. You want it as high as possible."