How to Determine What a Property is Worth
The easy answer is to call us and get a full property evaluation report. Realtors and real estate appraisers use what are called “comps,” which they hope will be accepted by the mortgage lenders. “Comps” is an abbreviation for comparables. These are similar properties that sold in a nearby area during the past six months. Three comps are preferred as the minimum for an appraisal and their sale prices should match the current sale within a very narrow range of fluctuation. Higher sales prices are usually OK; however lower sales prices are not. Selection of the proper comps is critical.
If the mortgage lenders disagree with the selection of the comps, the sales price may be forced to reduce to a lower amount or the potential buyer may be forced to pay a higher down payment. Offers that are made subject to obtaining financing for the sale can be destroyed and the escrow terminated when the mortgage lender does not accept the comps. This can happen after escrow is opened and both the buyer and the seller wants the sale to go through.
Unique Properties
What happens when a property is unique and there is really is not any similar property that sold within the past six months that is comparable. Perhaps the property is in a special location, it has historical significance, or it is about to be subject to rezoning from residential to commercial property that would substantially increase its value. It that case, as the Tom Hanks line from the Apollo 13 Mission movie goes, “Houston we have a problem!”
Besides lowering the sales price or increasing the down payment by the buyer, another way around this problem is to get the owner to carry back a second mortgage on the property so that the lender approves the first mortgage. This may be the only way to save the deal and have the sale go through as planned.
First mortgages have the priority repayment from a foreclosure sale if the buyer defaults. This used to be less of an issue a decade ago; however, after millions of foreclosures occurred in the USA, everyone thinks it is more probable. Having the present owner take a second mortgage position is risky for them and they may end up losing the money if the loan cannot be repaid.
Buyers may want to overpay for a property for a variety of reasons. Perhaps they are under pressure to move out of the home they currently have. Perhaps the new home is in the school district that they need to live in for their children. Perhaps they own an adjacent property and want to combine the two parcels. Nevertheless, just because a buyer wants to overpay, this does not mean the deal will go through.
Summary
It should be true that a home is worth what someone else will pay for it. However, nowadays a home value is also set by what mortgage lenders are willing to lend on it. We are experts in guiding homeowners how to set a reasonable price when they put their home on the market for sale. Reach out to us for a free market evaluation of what your property is really worth when you list it for sale with us.