When I recently purchased my house for $173,000, the appraisal came in at $173,000. Why was that?

I cannot speak for all other appraisers but this is my personal answer to this question.

The definition of market value is the price paid by a willing buyer and seller, etc. The seller and buyer are the actual market, not the appraiser. (The appraiser should analyze the market for data and trends and apply those to their appraisals.) In many cases, the seller has an experienced realtor who has performed some research (Competitive Market Analysis, etc.) or has in some way helped the homeowner establish a list price (in some cases a real estate agent and the broker can provide the list price of the property providing ample experience). Also, the property owner has seen properties sell in the neighborhood for years and might have a good handle on the sales prices and market values in the neighborhood. The homeowner may even have had an appraisal performed on the property prior to listing the property for sale.

On the other hand, the buyer has often been through numerous properties that were for sale (in this specific example, the homeowner was actually through 50 houses prior to making an offer on the specific property). The buyer has seen many houses in a certain price range and roughly knows the conditions and features of houses in a certain price range and style. Other times, there may be no properties listed in a certain price range and in a desired neighborhood so when a property does come up for sale, it lasts only a few days or a few hours with competing offers. When the buyer does finally make an offer on the house, the buyer should have an informed decision and make a reasonable offer.

Naturally, the seller wants the highest possible price and the buyer wants to pay the least amount for the property so the result is usually market value when they agree on a price. Thus, the final sales price often is the negotiation of a willing buyer and seller. If there is no pressure or reason for a distressed sale (possible foreclosure, short sale, the owner had to move out of state and drastically lowered the price of the house to sell quickly, etc.), then the sale should represent market value.

The appraiser must then examine how the property was listed such as how long it was listed, why was the property listed for sale, what was the motivation of the seller, was it adequately exposed to the market (FSBO sign in yard, word of mouth, realtor listing, etc.) and then provide similar and recent sales in the neighborhood or similar neighborhoods in the area to support the sales price. I try to give much weight to the buyer and seller for the above reasons since they are the ones that represent the market. Sometimes, however, the sales price cannot be supported by sales in the neighborhood. I make sure I have ample evidence if I cannot support the sales price. Sometimes the sales price is inflated so the seller can pay the buyer’s closing costs (so the seller clears or makes the same amount in the end) without regard to the recent sales in the neighborhood resulting in a price that may not be supportable.

Sometimes it is difficult to support the sales price with comparable sales. For example, market activity usually picks up in the spring and summer and slows down in the fall and winter leaving few sales and market activity in the winter months (depending on how cold or mild the winter weather is). When the market picks back up again in the spring the following year, many of the comparable sales we have to use are from late summer or fall from the previous year that do not reflect the slight increase in property values from the previous fall to the new spring market.

In rural central PA, a somewhat unique or a unique property may have only 2, 1 or 0 comparable sales due to the declining market activity caused by the current recession. A unique contemporary home on 40 or 50 acres may not have any good comparable sales in its neighborhood or surrounding neighborhoods. There may truly be no comparable sale within the last year to 18 months to help the appraiser arrive at a credible opinion of value (and one that often fall in the guides required by FNMA). In this case, the appraiser may have much difficulty proving or disproving the sales price since there is almost little to no current market data. In this case, the sales or contract price might be the best indicator of market value.

It is very important to analyze the factors surrounding the sale to determine if the sale is a market sale or if the property over-sell or under-sell. Moreover, the appraiser has to do adequate research to make sure the sales price is supportable. In the end, the appraiser must consider the sales or contract price, but must use his or her knowledge of the neighborhood, the market, comparable sales and listings to arrive at a conclusion of market value.

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