Appraisals & Market Value

A seller's advertised or list price should be treated as only a rough estimate of what he or she would like to receive. Some deliberately overprice, while others ask for close to what they hope to get and a few actually underprice their houses with hopes that potential buyers will compete and overbid.

The appraisal price is another estimate of value. The appraised price is how much money a professional appraiser estimates the home to be worth and usually is based on sales of comparable homes in the same area.

Purchase price and sales price are the same thing. Both terms mean the amount of money the successful buyer actually pays out to purchase the home.

Buying into a new-home community may seem riskier than purchasing a house in an established neighborhood but future appreciation in value depends upon many of the same factors.

Sales price increases in either type of housing are strongly tied to location, growth in the local housing market and the state of the overall economy, according to industry experts. Existing homes have been appreciating a little more than new homes but every once in awhile they're at the same level and sometimes the new home prices go up a little quicker.

The difference in appreciation of the two bears out in NAR's current research. For existing homes, NAR figures show the median price of existing homes went up 3 percent between 1994 and 1995; projections are that prices will increase 3.2 percent in 1996 and 2 percent in 1997.

For new homes, the association found that median prices went up 0. 8 percent in 1995 and are likely to increase another 0. 5 percent in 1996. For 1997, the group predicts 1.1 gain in median new-home prices.

Understandably, many parents can't afford to give away their personal savings for a child's down payment without some interest income or guarantee of a pay back. There are several ways for them to lend you funds for the down payment either through a personal note, a second trust deed or through special programs that require them to pledge securities or other assets to the lender.

The terms of a personal note or second trust deed could require monthly or annual payments amortized over a period of time or require interest only with a payoff at the time the home is sold. Another way to tap parents is through special third party lender programs.

Another program is the Merril Lynch's Parent Power home loan. If the person's mother of father opens an account with Merrill Lynch, they can use it as collateral (in place of the down payment) without actually taking the money out of the account. Meanwhile, funds in the account still gain interest and dividends. The program is available with 15 and 30 year fixed rate mortgages. For more information on the program, contact a local Merrill Lynch consultant or call 1-800-854-7154 ext. 8667.

Traditionally, people turn to two methods for determining home value — appraisals and something called a comparative market analysis.

Appraisals vary in cost depending on the price of the home, though they average about $300 for a $250,000 house. Appraisers review numerous factors including recent sales of similar properties, location, square footage and construction quality.

An appraisal is an estimate of a property's monetary value on the open market; an estimate of a property's type and condition, its utility for a given purpose or its highest and best use.

Comparative market analysis is an informal estimate of market value performed by a real estate agent or broker. It is based on like sales and generally offers a range of values including probable market value. Many agents offer a free analysis or property profile in hopes of acquiring a new client.

Brokers opinions, free or not, should be in writing, using professionally accepted appraisal techniques.

Individuals can also do their own cost comparison, though doing so may take several hours of research at the county recorders office.

Most county recorder's offices have indexes to match street addresses and parcel numbers.

People considering a foreclosure property would want to contact the lender directly first and obtain as much information as possible regarding what range of bids are being sought. In cases where you are unable to obtain permission to enter a property in foreclosure, consider knocking on a few doors in the immediate neighborhood.

Explain that you will be bidding on the property and ask the neighbors if they had been in the house and when, as well as the general condition at the time of their visit.

Individuals also can do their own cost comparison through researching public records kept at local county recorder's and assessor's offices. Generally, most county recorder's offices have indexes to match street addresses and parcel numbers, so the interested researcher will want to have these numbers before going to the recorder's office. In addition, private companies, using records from county recorders and assessors, now offer property profile information.

An appraisal is an estimate of a property's monetary value on the open market; an estimate of a property's type and condition, its utility for a given purpose or its highest and best use.

Comparative market analysis is an informal estimate of market value performed by a real estate agent or broker. It is based on like sales and generally offers a range of values including probable market value.

Even before starting to look at houses, find out what price house or condominium you can afford. Roughly speaking, you can afford to buy a home equal in price to three times your gross annual income. More precisely, the price you can afford to pay for a home will depend on six factors:

  1. Your income
  2. The amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
  3. Your outstanding debts
  4. Your credit history
  5. The type of mortgage you select
  6. Current interest rates

Lenders also analyze your income in relation to your projected cost of home ownership and outstanding debts to determine the size loan you can have. Your housing expense-to-income ratio is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance. The sum of these costs is referred to as "PITI".

Monthly homeowner association dues, if you're purchasing a condominium or townhouse, and private mortgage insurance are added to the PITI. Your housing expense-to-income ratio should fall in the 28 to 33 percent range, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.