Contract Price represents a specific price that a particular buyer and seller have agreed on to sell a home.
The Appraised Value is a licensed opinion on what the general market may be willing to pay for a home.
Unless the buyer is paying with cash, the sale of the home will be contingent on the Appraised Value meeting or exceeding the Contract Price. Why? Because the lender who is providing the loan to the buyer needs to validate that they can recoup their money should the buyer default on the loan. Industry standards rely on an appraiser’s opinion to determine if the lender’s money could be recouped.
A licensed real estate appraiser creates an Appraised Value using several variables:
Comparable Sales
Most appraisers start their opinion of value by gathering comparable sales to determine a baseline. A property is considered similar to the home for sale by evaluating these qualities: its distance from the home for sale (ideally within a one-mile radius), square footage, and design.
Amenities
Access to golf, tennis, pools, utilities, landscape services, and more impact an appraised value. However, it is important to note that the impact amenities typically have on the Appraised Value are minimal. Your pool or extra special hot water heater will not dramatically increase the Appraised Value.
Improvements
Home improvements that are reasonable and customary for the area can increase the Appraised Value. Things like kitchen upgrades and flooring help, but, as with amenities, the impact is minimal. Extremely expensive countertops do not typically yield higher Appraised Values.
What is important to note about improvements are those deemed “reasonable and customary.” If an appraiser finds improvements to be done incorrectly or in a non “workman like” manner—this is an issue. Especially with improvements that add square footage to the home. Ideally, square footage improvements are done by a licensed contractor and the square footage addition has been reported to the county to reflect an accurate square footage of the property.
WARNING—A discrepancy in measured square footage and listed county assessor square footage is a red flag in most loan transactions. This is where having a good realtor can be worth its weight in gold. Doing this research ahead of time and prepping the transaction for success is a big deal.
Market Trends
Appraisers also identify and analyze relevant market trends. These may include economic development, natural disasters, changing employment patterns, new public policy, evidence of a “bubble” or “bust” market, and more. If the market trend is positive, it can positively impact the Appraised Value. If it is negative, it can negatively impact the Appraised Value. As with the other factors, the impact market trends have on the final value is minimal.
A Contract Price and Appraised Value are two different things. One is an agreed upon negotiation. The other is an opinion based on relevant facts. However, the biggest takeaway should be an understanding that things like Amenities, Improvement, and Market Trends impact the Appraised Value way less than most people think. What other comparable homes are selling for is the biggest factor.
To see what Contract Price you qualify for, schedule an appointment with one of our Mortgage Advisors below!
