In the real world, very few individuals order appraisal reports to establish an offering price or to substantiate a purchase price. At the point that an offer to purchase (in a typical residential transaction) is made, the price has been set by other parties, not the purchaser. The price has been determined by:
- the seller, who wishes to obtain the highest dollar possible. The seller is not expected to be objective about the property value, and every purchaser becomes a seller at some point in the future.
- the agent, who receives a percentage of the price as compensation and often represents the seller in the transaction.
The real estate agent will typically perform a comparative market analysis (CMA). The appraisal laws in most states allow real estate agents to perform CMAs without an appraiser's license or certification. A CMA is a necessary part of the agent's preparation for a listing and consists of examining sales of properties in the area to arrive at a listing price. The reliability of the CMA depends upon the agent's experience and the characteristics of the property. The agent will suggest a selling price to the seller based upon the analysis. However, neither the seller nor the agent are bound by the results of the analysis, and the agent is not required to follow any formal procedure in completing the CMA. If a seller wishes to list the property at a price higher than the price suggested by the agent, then the agent may be forced to accept the listing at that price or risk losing a commission. Listing agents, just like sellers, must protect their interests whenever feasible and legally possible.
Purchasers believe that they are getting a good deal if they make an offer lower than the listed price. But how far above the market value was the property listed: 10%, maybe 20%? A negotiated price of 10% less than the listed price, on a property that was listed at 20% above its value, is not a bargain. The agent cannot tell the purchaser that the offered price is higher than the value, or even higher than their own CMA. In most states, they must submit the offer to the seller.
So, is an appraisal important when considering making an offer on real estate? Is being armed with a reliable estimate of value a desirable position when purchasing a property?
The seller of a property may want to order an appraisal before listing the property. Of course, the cost of the appraisal is always a deterrent, especially if the seller knows that a buyer will pay for it when applying for a loan. But the appraisal is often justified. The seller could lose a sale if:
- the property appraised for less than the sale price when appraised by the lender's or buyer's appraiser,
- the appraiser identified a problem that could have been solved before the sale, if the seller had known,
- the property will not qualify for the type of loan indicated on the contract, allowing the buyer to back out of the deal
- the property is listed too high, and remains on the market too long before selling.