What's your house worth?
If you think your house was worth more six months ago than it is now, you might be right. It's hard to know for sure until you get an offer.
Even then, it's hard to know what's going on with pricing. A multi-unit building on Chicago's South Side was recently appraised at $450,000 but sold for $160,000.
Is that building worth nearly a half-million dollars? If other homes in that area were recently foreclosed on, could the subsequent buyer really sell the home for $450,000?
The concept of "value" is being redefined by the declining real estate market, which is making life tougher for appraisers, whose job it is to figure out the value of a piece of property.
With fewer comparable sales and sellers offering "concessions," some appraisers are having a tough time figuring out what value really means.
How do you value a house in a declining market? Carefully.
"When you're in a volatile market, you want to get the best appraiser you can," explains John Bredemeyer, a spokesman for the Appraisal Institute, a nonprofit trade association in Chicago.
Bredemeyer, who has nearly 30 years of experience as an appraiser, says a good evaluator will use all of the tools available, including looking at comparable listings, homes that are under offer and closed sales.
"It's important for appraisers to be attuned to other professionals in the local area. [They should be] always talking to brokers and agents to get a feel for what they're seeing," he says.
One issue is that more sellers are offering concessions, to get buyers to the closing table. A concession is something (often cash) that the seller gives to the buyer outside of the deal.
"If a seller pays $1,000 of closing costs on a $250,000 house, it probably didn't affect the sales price. A $250,000 house could sell anywhere from $250,000 to $260,000 on any given day. It depends on how the seller and buyer negotiate," Bredemeyer explains.
But if the seller gives the buyer a $50,000 new Mercedes, does that change the deal? It should. "When you take the boat, the car in the garage, the $10,000 payment back, what real estate did the buyer purchase?" he says.
"As appraisers, it's important to always research those sales. We need to drill down into those transactions," he says, adding, "It's key to remember what real estate the buyer is buying."
When appraisers figure out the "market value" of a piece of property, they're trying to calculate "the most probable price marketed properly without concessions, not including someone selling under duress," Bredemeyer explains.
If a property is about to be foreclosed, and the seller is basically giving the property away for the value of the mortgage, that would be a good example of duress. It may not accurately reflect what is happening in the marketplace. A good appraiser would realize the sale is an aberration and discount it when looking at local market value.
But if 20 houses in the neighborhood are being foreclosed on, it could be indicative of a change in value. "Any time you're in a volatile market, it's always a challenge to the appraiser," Bredemeyer says.
But he sees a difference between market value and the sales price of property.
"Market value really deals with a sale to the typical buyer. What is typical can be difficult [to define], but it's the most likely person who buys it. The sales price could be different from the market value to a specific buyer. The buyer may be willing to pay more" or less than what the appraiser's assessment of market value is for that property at that time.
Bredemeyer appraised a property that had sold for $10,000 more than any other house in the neighborhood. As he analyzed the factors involved with the transaction, he discovered that the owner of the property had decorated the home in a particular way.
"The average buyer would not pay more for this. But the buyer had exactly the same color scheme, and they were willing to pay more for the property because they found the one house that perfectly matched [their furnishings]."
Although Bredemeyer talks about the importance of finding a good appraiser, consumers are almost never in the position of hiring one. Typically, the bank assigns an approved appraiser to do the appraisal. Good or bad, you're stuck with the bank's choice.
To make sure the appraiser has all the information, you (or your agent) can provide the appraiser with relevant market data that demonstrate the value of the property.
But whether that value will hold after the closing, in a declining market, remains the unanswered question.
Contact Ilyce Glink through her Web site, www.thinkglink.com, by mail at Real Estate Matters Syndicate, P.O. Box 366, Glencoe, IL 60022, or calling her radio show at 800-972-8255 from 11 a.m. to noon Sundays.