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Ask Charles Cherney - Question #7 - What is the appraised value?

What is the appraised value?

The appraised value is the specific dollar value placed on a property by a licensed appraiser.

Cambridge and Somerville assess each property each year for tax purposes - that is the assessed value.

As a Realtor, I frequently complete a valuation analysis for a property to arrive at a market range of value.

It is a Licensed Appraiser who completes an appraisal and comes up with an appraised value - a specific dollar value for a specific property on a specific date. Typically, an appraisal happens in the following circumstances:

1) A property owner wishes to refinance or to establish a home equity line of credit or to establish the value of the residence for some other purpose such as estate planning or a divorce proceeding

2) A buyer with an an accepted offer is getting a loan to purchase the property.

When I meet with a prospective seller, I often learn that the seller has recently had an appraisal of their property completed by an appraiser. For whatever reason, the appraised value is often quite high. My role as a Realtor is to complete a valuation analysis and arrive at a market range of value for a property.

The appraised value arrived at by the appraiser can mean a lot in a real estate transaction. Consider the following example:

123 Main Street is listed for sale for $425,0000.
John and Mary make an offer for $500,000.
There are six offers on the property.
John and Mary's offer for $75,000 over asking is the winner!
John and Mary's offer indicates they are seeking a loan for 80% of the purchase price (80% of $500,000 is $400,000)
John and Mary's lender requests an appraisal. The appraiser visits the property and completes his appraisal report.
The appraisal report submitted to the lender by the appraiser indicates the appraised value is $450,000.

Okay, so what happens in this scenario? Good question! Typically, the lender will take issue with the property appraising for less than the purchase price if the loan to value ratio is 80% or greater. In the example above, the lender may say to John and Mary, we will loan you 80% of the appraised value - 80% of $450,000 or $360,000 - but we will not loan you 80% of the agreed upon purchase price - 80% of $500,000 or $400,000.

So, okay, the lender in this example is willing to lend $360,000 but the buyer seeks loan for $400,000. What happens?
- Well, the deal could die because the loan is not approved.
- The buyer could potentially contest the appraisal and request a second appraisal to hopefully solve the problem.
- The buyer makes a larger downpayment to solve the problem. In this example, the buyer puts down another $40,000 and obtains the loan for $360,000, the amount the lender is willing to loan.
- The buyer may not be capable of a larger downpayment. If that is the case, the seller must reduce the purchase price to keep the deal alive. In this example, the seller would reduce sale price to $460,000 so that buyer can proceed with purchase with the approved loan for $360,000.
- Sometimes, seller and buyer meet somewhere in the middle. In this example, perhaps the buyer can put down another $20,000. And the seller agrees to reduce the purchase price by $20,000 and the property sells for $480,000 instead of $500,000.
- Of course, none of the above is in play if the buyer has a larger downpayment in the first place. For example, if the buyer has a downpayment of 50% of the purchase price - or $250,000 of $500,000 in this example - the lender is going to have no issue with giving the buyer a loan for $250,000 based on an appraised value for $450,000. That larger downpayment gives the lender a lot of cushion and makes it easy.

When an appraiser visits a property in the course of a real estate transaction to complete his or her appraisal, the appraiser is fully aware of the agreed upon purchase price. It is normal for the listing agent to give the appraiser a copy of the signed purchase and sale. It is also normal for the listing agent to give the appraiser relevant comps - that is, relevant recent sales for like kind properties that support the purchase price. It is not uncommon for the appraisal value to come back at the purchase price - or sometimes even a bit above the purchase price. It's good news for everyone in the transaction when the property's appraised value is equal to or higher than the purchase price, as it means there is no appraisal issue and the likelihood of the loan being approved is very high. Of course, it can mean a world of difference if the appraiser is experienced and has knowledge of property values in the community of the subject property. 

So, in summary, the appraised value can be vitally important in a real estate transaction. The good news in the Cambridge and Somerville market is that, generally speaking, the appraised value is not an issue. More often than not, there are comps to support the purchase price.

I help Buyers BUY and Sellers SELL in Cambridge and Somerville, MA. Here to help you. Let's talk.

Call me at 617-733-8937 or email me.

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