Value Roulette

Beginning the loan application process (or trying to determine the listing price of a house) without any idea of the actual value range of a property is something similar to the launching of a space exploration without knowing where you are going.

During the thirty plus years, in my real estate appraisal career, I was continually asked to support the same kind of idiotic practice, by loan officers, mortgage brokers and borrowers alike. It is a practice that I candidly termed as ?›ƒ?ª?Value Roulette.?›ƒ?ª?

This view of Value Roulette typically began because both the borrower and loan officer had no real concept of a property?›ƒ?ªƒ?›s true market value. Value Roulette is perpetuated by two specific issues, 1. a homeowner?›ƒ?ªƒ?›s, borrower?›ƒ?ªƒ?›s or lender?›ƒ?ªƒ?›s need and 2. ignorance (lack of information), although in some cases it was motivated by greed and stupidity. Having witnessed the recent upheaval in the housing market and the economy, I have recognized that this practice continues on at an ever increasing rate affecting many unsuspecting homeowners. So, I am offering this compilation, again, in an effort to put an end to this frustrating, time consuming, costly and dangerous practice.

There are many loan officers who recognize the importance of knowing the value of a property before they begin, and it probably explains why they like real estate purchases. You see, everything is usually neatly spelled out in the purchase and sale agreement, which includes a fixed value and down payment. No guessing where to begin. (Although, imagine how frustrating this whole process can be if the purchase and sale agreement is based upon an imaginary number.)

The number one job of a loan officer (and the real estate agent), as I see it, is managing the borrower?›ƒ?ªƒ?›s expectations throughout the entire process. This is relatively simple in real estate purchases because the value is anchored and there generally are no surprises.

Unfortunately, the process is more difficult in cases of refinancing, as the value expectations are not based upon a fixed value, but rather the borrower?›ƒ?ªƒ?›s needs. It even gets more complicated when the borrower has recent reference points upon which they have based their expectations. They could be based upon other sales they ?›ƒ?ª?know?›ƒ?ª? about in their neighborhood, active real estate listings or even rumors of market values from homeowners in the area who have recently financed or had an appraisal completed.

In most cases, the entire loan process is dependent upon a property?›ƒ?ªƒ?›s value, so one of the first things a loan office will generally ask the borrower for is a list of assets, particularly the real estate that is going to be used as collateral, along with its Current Market Value. Unfortunately, the best estimate that most owners usually have is the Assessed Value from the County Assessor, which accompanies each year?›ƒ?ªƒ?›s tax bill. Since these values, for a variety of reasons, are typically below Current Market Value, when asked, most owners and loan officers make a wild guess, and report a ?›ƒ?ª?Guestimated Value.?›ƒ?ª?

The loan submission process takes at least eight hours of client interface, data and documentation collection and paperwork preparation for the average loan officer. Sad to say, it is often through this interaction and long before the appraisal assignment is even ordered, that the ?›ƒ?ª?magic number?›ƒ?ª? and the borrower?›ƒ?ªƒ?›s expectation is established.

Anyone should be able to recognize the problems with this approach. This is a situation where everyone?›ƒ?ªƒ?›s time and expectations are based upon a gamble. (Round and round and round it goes?›ƒ?ª?? where it lands nobody knows ?›ƒ?ªƒ?? Value Roulette!)

Now imagine what happens when a homeowner decides it time to sell their home. Often people are tempted to start with the price they paid for their home and then they add a healthy markup and set their mind (and expectation) on ?›ƒ?ª?that?›ƒ?ª? price. Unfortunately, this strategy rarely results in a true reflection of the true market value of the home.

Others may just simply rely on the assessed value of the last tax statement thinking that the valuation is the most current reflection of market value. Those who follow this course often are surprised at how quick ?›ƒ?ª?their marketing efforts?›ƒ?ª? were in getting a sale. Yet, as someone once said, ?›ƒ?ª?people are always looking for a bargain, and someone will always be ready if you are willing to give it away.?›ƒ?ª? It can be a bitter pill to realize that your lack of understanding allowed you to make a choice that was not in your best interest.

Everyone knows that you can ?›ƒ?ª?always?›ƒ?ª? rely on the local information received from your friends and neighbors or even the flyer attached to the home for sale right down the street. A homeowner?›ƒ?ªƒ?›s personal comparison of their home?›ƒ?ªƒ?›s perceived value and benefits to those of another located in their neighborhood must surely be a reflection of the real market value of their home?

The notorious appraisal on your neighbor?›ƒ?ªƒ?›s home, which is often talked about but never seen, is clearly the most reliable source for market values in the immediate neighborhood, even though there are very few similarities between the two properties.

Of course, “if they are asking for ‘that’ price on the foreclosure in the neighborhood, then the value of our home must be $50-100,000 more than that!”

Even in the setting of an offering price, Value Roulette continues to go round and round and where it stops? The inspecting will finally comes to know.

Overpricing your home can have significant has consequences. Yet many mistakenly believe thoughts like: “Buyers who really like my home will make an offer regardless of the listing price;” “I can always come down on price when an offer comes in;” “My home is so much nicer than all of the others. A higher price has to be justified;” “I don’t have to sell right away;” or “I want to test the market first to see what I can get.”

The truth is that an asking price that is beyond market range can adversely affect the marketing of a property. Repeated experience shows:

  • The best time to capture a buyer is in the first weeks when sales professionals and buyers interests are the highest. Don’t squander this critical marketing period with an overpriced home.
  • When a home is overpriced, fewer buyers are attracted, and fewer offers will be received.
  • The property will attract “lookers” and the overpriced house will help competing houses look better by comparison.
  • Sellers who start with an overpriced home and refuse to change it can be branded as unreasonable.
  • A real estate sales professional?›ƒ?ªƒ?›s enthusiasm is dimmed by overpriced homes.
  • Advertising and other marketing efforts are neutralized and the marketing time is prolonged which results in the loss of the initial marketing momentum.
  • Buyers and real estate professionals tend to discount and overlook aged properties. So, if you want to prevent your house from being overlooked, don?›ƒ?ªƒ?›t ask too much for it.
  • Aged properties tend to draw lower offers and early offers tend to be higher, so you must price your property carefully in order to get fair offers.
  • If a property does sell above true market value, it may not appraise, and the buyers may not be able to secure a loan.
  • The property may eventually sell below market value or it may not sell at all.

Marcie Geffner?›ƒ?ªƒ?›s article in Realtor.Com titled, ?›ƒ?ª?How to Price Your Home – Pricing decisions should be grounded in reality rather than wishful thinking?›ƒ?ª? offers the following tips:

  1. Abandon your personal point of view. How much will a ready, willing and able buyer be willing to pay for your home? Buyers don’t care how much you paid for the home, how many memorable moments you and your family shared in the home, how much cash you need for the down payment on your next home or how much time and money you’ve invested in your home’s hardwood floors, fresh paint, lush landscaping or other improvements.
  2. Get a couple of CMAs. Invite at least three real estate agents to visit your home and give you their opinion of its likely selling price. Ask for a “comparative market analysis” (CMA), which shows the prices of comparable recently sold homes, on-the-market homes and homes that were on the market, but weren’t sold. The on-the-market homes are the “competition” for your home. Ask the agents why each home was included in the CMA and whether any other comparable homes were eliminated from the CMA. Price recommendations based on CMAs aren’t gospel. Some agents will tell you to under-price your home in hope of sparking a bidding war. Others will suggest a flatteringly high price to “buy” your listing only to demand a price reduction a few weeks later.
  3. Do your own market research. Go to open houses in your neighborhood and try to make an impartial assessment of how those homes compare to yours in terms of location, size, amenities and condition. Assuming all the asking prices were the same, would you buy your home or someone else’s?
  4. Calculate the price per square foot. The average price per square foot for homes in your neighborhood shouldn’t be the sole determinant of the asking price for your home, but it can be a useful starting point. Keep in mind that various methodologies can be used to calculate square footage.
  5. Consider market conditions. Are home prices in your area trending upwards or downwards? Are homes selling quickly or languishing? Will your home be on the market in the spring home-buying season or the dead of winter? Are interest rates attractive? Is the economy hot or cold? Will you be selling in a buyer’s market or a seller’s market? Is the local job market strong or are employees fearful of staff reductions?
  6. Sweeten the transaction terms. Some buyers have needs that go beyond the bottom line. If you’re willing to close escrow quickly, you’ll attract buyers who want to move in right away. If you can offer seller-financing, your home will appeal to buyers who need to stretch their financial resources. A lease-option can help first-timers who need down payment assistance. The more creative and flexible you can be in meeting the buyer’s needs, the more success you’ll have in pricing your home to sell.

Selling your home is one of the biggest financial decisions you will make in your lifetime, and as such, you need to be as well informed as you can possibly be. Therefore, may I recommend that you work with ERA Advantage Realty ?›ƒ?ªƒ?? Your Local Real Estate Professionals, who not only have the credentials and access to information, but who can demonstrate a thorough understanding of value and the market.

— The views expressed are the fundamental insights of Tom Fairbanks (the author) who spent the majority of his adult career as a Residential Real Estate Appraiser. He is a consultant to ERA Advantage Realty ?›ƒ?ªƒ?? Cache Valley?›ƒ?ªƒ?›s Local Real Estate Professionals through his association with GraphiXpress Network in Smithfield and Logan, Utah which owns and operates Cache Valley Print and Honor Copy in Brigham City, Utah. They offer Website Development & Graphics Services along with a full range color and black & white (standard or wide format) copies & print, digital scans & archiving, direct marketing & mailings, administrative and other business services.


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