Most sellers want to sell "above value" and most buyers wants to buy "below value."  In a balanced world, however, a seller would sell for the "actual value" of their home, and a buyer would buy for the "actual value" of the home.  That's in a balanced world --- obviously, it doesn't usually happen that way.

We get one glimpse of whether the contract price is off the mark when we learn of the appraised value through the financing process.  Here's an oddity (or is it?):

• If the appraised value is low (lower than contract price) the lender typically won't let the loan proceed, depending on the loan program, financing terms, etc.  Thus, the buyer will typically try to re-negotiate the contract with the seller since the appraiser has concluded that the house's value is below the contract price.
• If the appraised value is high (higher than contract price) the lender doesn't mind, the buyer definitely doesn't mind, and the seller usually doesn't know.  The appraiser was hired by the buyer's lender, so the seller doesn't have a right to know the value of the appraisal.
  

Here are a few interesting repercussions from some of my most recent real estate transactions....

Rent-To-Own Prospect Wants The Best Of Both Worlds
A prospective tenant/buyer (rent-to-own) wants to negotiate purchase terms for what is essentially their option to buy a year into the future.  They want to buy for the lower of the price agreed to now, and the appraised value a year from now.  Wait a minute!?!?!  It would seem reasonable (balanced between buyer and seller) to either both take a gamble on ups/downs of the market and agree to a price now OR both agree to use a value determined in the future by an independent appraiser.  The lower of the two doesn't seem very reasonable for this prospect who is already trying to negotiate by asking for a lease-to-own when it isn't the seller's intent.

Buyer Thinks Seller Should Adjust, But Won't Do The Same
This is a bit obvious from the above referenced ways that thisappraisal process works, but it does seem to be a bit odd from theperspective of trying to achieve a balanced transaction between buyerand seller.  If the appraisal comes in low, the buyer gets tore-negotiate down.  So why doesn't the seller get to re-negotiatehigher if the appraisal comes in high??

Seller Agrees On Price, Then Seeing Appraisal, Refuses Repairs
I'm exaggerating this one a bit to make a point, but in a recent transaction, the lender (for some reason???) shared the appraised value with the seller's Realtor.  The seller thus was told of the appraised value, which was more than $10,000 higher than the contract price.  Certainly, the seller felt like they left money on the table, though the day before they had been quite thankful for the buyer and the price he was paying.  As a result of knowing of the value supposedly left on the table, this seller loses much of their desire to negotiate on repairs, even making a remark about how the buyer can make repairs using the free equity inherited from the lower-than-appraisal contract price. 

And while we're on the subject of appraisals, here's another strange aspect of the appraisal world --- feel free to offer your opinions....

Wikipedia defines the "market value" as determined thorough a real estate appraisal to be:


So, wait a minute --- read that through again --- isn't that exactly what is evidenced in the real estate contract that is the basis for the appraisal in the first place??

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Have any questions? Contact Scott Rogers at 540-578-0102 or scott@funkhousergroup.com