Tuesday, January 22, 2008

How to Value a Property - Whose Fault is it if I Paid Too Much?

There is an article in today's New York Times about a woman who is suing her Realtor because she believes she paid too much for her house. She claims her Realtor withheld important information about the value of the home, and that the lender and appraiser aided in this fraud. As a real estate professional, I am intrigued by the specifics of the suit. But it brings up a broader question. Excluding cases where there has been fraud or misrepresentation, what influences a buyer's opinion when deciding what a home is worth?

Buyers look to a number of resources for help when deciding on an offer price. Typically, the primary source for pricing information is their Realtor. Hopefully the Realtor and client have looked at other homes in the neighborhood for comparison. In addition, the Realtor should be able to show the client sales prices for similar homes. But no two homes are identical. Even homes with the same floor plan can have vastly different values depending on condition, upgrades, lot, views, etc.

A second source of information is the appraisal. At it's most basic, an appraisal is designed to assure the lender of the home's value. This is why many purchase agreements have a contingency that states the appraisal must equal or exceed the offer price. Usually the appraiser finds recent sales of similar homes. He then lists the differences between these "comparables" and the subject property and assigns a value to each difference. By adjusting the value of the subject property based on the value of these differences (adding value for assets the subject has that the others don't, subtracting value for assets the comparables have that the subject does not), he comes up with the appraised value of the home.

But buyers also turn to another source for help in establishing a home's worth and, in my experience, this group has more influence then either the Realtor or the appraiser. It consists of friends and family. They may or may not have actually knowledge of similar property values, but they will certainly have an opinion. Most of us like to have our decisions confirmed by those we know and trust. If a friend looks at the home, hears the offer price and starts to gush about what a great a "deal" it is, odds are that the buyer will go ahead and make the offer. If, however, this same friend frowns and suggests the price is too high, no amount of comparables proving otherwise will make most buyers comfortable with the offer price.

But the final judge of a property's worth comes down to the buyer herself. We all see property through our own set of preferences and prejudices. Sometimes we know what we want, describe it to the Realtor, and he finds something that comes close. But every Realtor who has been in the business for more than a few years has a story about a buyer making a list of "must-haves", then buying something different.

When a buyer walks into a home and her eyes light up, nothing and no one will dissuade her from doing whatever she can to get the home. Her Realtor can show her "better" homes; the appraiser can provide lower-priced comparables; friends can point out the home's defects. But even with all this data, sometimes a buyer simply must have that house. It's as if she has fallen in love. And, as with love, a buyer can be blind to the house's true value. It's only after the honeymoon period is over that the buyer may realize she has paid too much. And, like a marriage, it can be very costly to "divorce" your house.

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