Why is an appraisal important?
We come across a lot of people who claim to know the exact value of their home. How many times have your friends or neighbors told you that their house has a value of xxx and they are sure this is the least amount they can get if they put their house on the market?
If you had health problems, it’s likely you would spend hours looking for the best doctor and the most reliable information about the problem. Your home’s value should be treated with the same amount of due diligence and thus requires professional consulting.
Appraising like any other liberal profession is based on a lot of experience, geographical competence, and knowledge. Several methods can lead to a conclusion of value for your property. The easiest and most unreliable way is to look on the internet. Many sites will provide you with a value for your property. Some of the values might be close to the real “market value” but this is unlikely. Most places online derive value through algorithms that do not take into account all the factors that an appraiser considers when reconciling the value of your property.
If the property is in a homogenous market, with houses that have similar characteristics, it is easier for a statistical model to guess a value. This is the ideal case. Usually markets are heterogenous and properties are not similar. Even if two properties have the same room count, living area, and style, it is unlikely they have the same condition and build quality.
How many times do we hear that someone’s “neighbor just sold their house for xyz dollars” and we think that “if their house sold for that amount, we can sell ours for much more…” This is only because we are biased, and this leads us to one of the answers to the question in title:
An appraisal is important because it is an unbiased opinion of the market value of a property.
What do we do if we cannot rely on the internet and on our personal opinions? Depending on why we need to know the market value of our property we might ask a Realtor about their opinion. This is a big step forward! Realtors are trained and have knowledge and experience about the real estate market, but their expertise is focused on how to sell or buy houses for their clients. Most of them are very good, will represent you honestly, and will help a lot in the real estate process. Why are they doing this? Same as you and me, they need to pay the bills and the money comes from their hard work and long hours spent with clients to earn a commission. One of their tools is the Comparative Market Analysis (CMA) or Broker Price Opinion (BPO). These tools tell you the value of the house you want to buy or sell. There is only “one small catch”. Realtors receive commission only if the deal is closed, so there is an interest there.
In every report we must include a declaration page where among other things we state that we “have no present or prospective interest in the property that is the subject of the appraisal, and we have no present or prospective personal interest or bias with respect to the participants in the transaction.” This declaration is another answer to the title question.
Can you rely on a CMA or BPO? Yes, of course you can. A good realtor will tell you mostly the same thing as an appraiser. Then why should you pay money for an appraisal?
You need to minimize the risk of losing in what is probably one of your major life investments – your house.
Among many other questions, we get asked how precise the appraised value is. We cannot answer this, but we can surely say it is the most accurate value from a knowledgeable, unbiased person.
Let’s assume the Internet tells you the value with a precision of +/- 5% (pretty good error margin). For a house with a value of $227,300 (median sale price of homes in the United States in 2017) the error is +/- $11,865. I don’t know about you, but I would rather have this money than give it up. In this case you should ask yourself whether paying 3-4% of this amount, let’s say $400, is a good investment to potentially saving 5% of your property’s value when sold.
Another answer to the question is, appraisals are important because they minimize the risk of your prospective real estate transaction.
Why should you get an appraisal and not rely on other sources for your house value? Because same as for your health, you don’t want treatment over the phone, or a chat on the Internet with somebody whose credentials you cannot verify. You want a doctor, and you don’t want any doctor, you want the best doctor!
In Conclusion (tl;dr)
- An appraisal is important because it is an unbiased opinion of the market value of a property.
- The appraisal is being performed by a person who does not have any present or prospective interest in the property.
- The residential appraisal is a tool that allows you to minimize the risk of your prospective real estate transaction.
- FAQ (3)