Home appraisals and sale prices are two integral components of the real estate market that often spark curiosity among homebuyers, sellers, and industry professionals alike. It is a common belief that home appraisals should precisely match the sale price, ensuring fair and accurate property valuations. In this blog post, we will delve into the factors that influence the alignment between home appraisals and sale prices, demystifying the process and exploring why, in many cases, they tend to converge.
- The Role of Market Demand and Supply
The dynamics of supply and demand are crucial determinants of a home’s sale price. When there is an abundance of potential buyers competing for limited housing inventory, bidding wars may ensue, driving the sale price higher than anticipated. In such scenarios, appraisers consider the competitive market conditions, recognizing that the sale price reflects the current demand for that particular property.
- The Importance of Comparable Sales (Comps)
One of the primary methods used by appraisers to evaluate a property’s value is through the analysis of comparable sales, commonly referred to as “comps.” These are recently sold properties in the same neighborhood with similar characteristics, such as size, age, condition, and amenities. When the sale price aligns closely with the comps, it indicates that the property’s value is in line with recent market transactions.
- Seller’s Pricing Strategy
The seller’s pricing strategy plays a significant role in influencing the sale price and its convergence with the appraisal value. Sellers often set the initial asking price based on their perceived value, market trends, and other factors. If the property attracts multiple offers, the seller may accept a higher offer than the original asking price, leading to a sale price that is well-aligned with the appraisal.
- Buyer’s Willingness to Pay
Buyers’ willingness to pay is another vital factor in determining the sale price of a property. Buyers may be emotionally invested in a particular home or location, leading them to offer more than the appraised value to secure the property. This emotional attachment can result in a sale price that surpasses the appraisal amount.
- Appraiser’s Expertise and Methodology
Professional appraisers rely on their expertise, knowledge of the local market, and a standardized approach to valuing properties. They take into account various factors, such as recent comparable sales, market conditions, property condition, and improvements, to arrive at an unbiased and accurate appraisal value. While appraisers strive for precision, their valuations may not always perfectly match the sale price due to the influence of market forces and individual preferences.
- Market Fluctuations
The real estate market is dynamic, and property values can fluctuate over time due to economic conditions, interest rates, housing demand, and other external factors. Appraisals are typically valid for a limited time, usually a few months, and any significant shifts in the market during that period could lead to discrepancies between the appraisal and the sale price. While it is ideal for home appraisals and sale prices to perfectly align, several factors contribute to slight disparities between the two. The interplay of market demand and supply, the significance of comparable sales, seller and buyer behaviors, as well as the expertise of the appraiser all play crucial roles in determining the final sale price. Nevertheless, a well-researched and professionally conducted appraisal remains an essential tool in the real estate industry, providing invaluable guidance to buyers, sellers, and lenders in making informed decisions. Understanding these factors can help us appreciate the intricate relationship between home appraisals and sale prices, enhancing transparency and trust in the real estate market.
Real estae appraisers consider many factors when attempting to create their own opinion of value for a property. Fannie Mae defines market value as “the most probable price that a property should bring in a competitive and open market under all conditions requisite to a fair sale.” This definition closely aligns with the purest form of market value, considering an idealized open-market scenario with informed and willing an able buyers and sellers.
In a purchase transaction appraisers have additional data available they may not have in other types of assignments. Appraisers are able to see the seller’s marketing efforts, the amount of buyer interest in the home, they can ask the listing agent how many offers were received, they can see the days on market and they have a signed contract indicating a buyer and seller are ready willing and able to move forward with the sale. At this stage the appraiser understands the price that has been agreed upon and they move towards other market data to verify the validity of the contract. If the market conditions and comparable sales are in line with the contract price, most appraisers will not pretend to know the market better than the results of the market. This is why appraised values are often in line with agreed upon sale contracts in purchase transactions.