What is Your Property Worth in the Current Market – or – Who Invited the Appraiser, Anyway?

I don’t have to tell you that there are a lot of factors to be considered when determining property values - some scientific, (probablities, sales histories, market averages, etc.) and some emotional (how motivated is the seller, can that one-in-a-million buyer live without the property, etc.).

One thing is certain, buyers need money to buy property, and most of that money comes in the form of a loan of some sort. Very few of us have the cash needed to buy property outright - so we need help. Usually that’s from a bank or perhaps the seller of the property. With most loans, even with seller financing, an appraisal is required at some point in the purchase and sale transaction. When an appraisal is required, it is generally the case that the property must appraise for the agreed upon price or there is no deal. That said, it is critical for potential property sellers to understand what guidelines the appraisers are operating under at any given time in the marketplace.

Typically, appraisers use similar, recently sold properties as comparables when they are determining an appraised value. You are correct if you assume that in this market, it is challenging for appraisers to find a lot of recently sold similar properties. There just aren’t that many. What they resort to then, is looking at properties that may have sold quite some time ago, or properties that aren’t as similar as they would be in a regular market. When appraisers have to get creative with comparables, they are required to make adjustments to account for the differences in properties.

In a recent conversation with a local appraiser whom I consider to be one of the best, I was informed that one of the calculations being used to equalize property values is a one-half to two percent PER MONTH decline in value over the past 24 months. I knew that math class I took spring quarter would come in handy - you gotta do the logarithm to figure that out! Here’s the equation:

C=P(2.7)-it 

C= current value
P=past value
i=percent decline
t=number of months

If an appraiser felt your house was worth $500,000 24 months ago, and you are in an area or property type that declined 1% per month, the equation to calculate your present value would look something like this:

C=$500,000(2.7)-.01(24)
C =$393,951. (The 2.7 is a constant roughly equaling the value of natural logarithm e.)

I was told that in our market, condominiums and vacant land would most likely be at the higher end of the percentage spectrum, and conventional single family residences would be at the lower end.

Now, you might not care what an appraiser thinks your property is worth, and not all properties are going to fit into neat equations and probabilities, but it is a good thing to know as much as you can about what might factor into a buyers ability to buy your property. It’s just one more way a seller can get the competitive edge in todays market.