Amongst all of the stressful trials and tribulations of the economy lately, many are looking for a silver lining in what has been, for the most part, a very cloudy set of circumstances. Even though it is common knowledge that interest rates are at an all-time low and that real estate is selling, in some cases, for half what it did only two or three years ago, many people are reluctant to get into the market. There seems to be an element of confusion in the air.
I am going to suggest to you that the case for real estate investment is not that different from that of stocks. Most people do not understand what is actually going on … who to trust and who not to trust. We hear stories of great deals on foreclosures, yet not everyone is looking to buy foreclosures. Sometimes, we hear of ridiculously low prices, and at other times, prices do not seem to be that different from what they were in the past. We hear statements like: “The property is being offered for sale for half of the appraised value.” If it literally is being offered for half of the appraised value, what is an appraisal worth anyway? Why is this, and how might we look at this issue of real, real estate values? To those with questions regarding this, I offer the following:
Time
The value of real estate changes with time, and lately it has been changing a lot. If a property is being offered at half of the appraised value, when was the appraisal made? Every appraisal has an effective date. If the effective date of an appraisal was two years ago, it is misleading to maintain that the property is being offered at half of the appraised value. It would be accurate to state that the property is being offered at half of what the appraised value was two years ago. But that does not happen, does it? Salespeople tend to overlook facts of this type sometimes.
The definition of value
Many people are not aware that there are many types of value and each value carries with it a different dollar amount. The type value and the definition of this value must be stated in each appraisal in order for the appraisal to meet current appraisal standards. This is the case, yet when did you hear someone state the type value addressed in a given appraisal?
While there are many types of values addressed within a real estate appraisal, market value is the most common. This is when a property is exposed to the market through traditional means, providing, among other things, professional marketing and offering buyers adequate time to shop and to make competent decisions.
Would this be the same value used in connection with the foreclosure of a property? The answer is no. If an appraiser were asked to appraise a property pending foreclosure proceedings, would the value be the same as that if it were subjected to the market through the Multiple Listing Service (MLS)? It would not. The appraiser would be seeking a liquidation value that will almost always be lower than market value. This is because the appraiser is to assume that the property is subject to auction and that buyers will be required to purchase on the spur of the moment, sometimes without inspecting the property or having all of the facts concerning a property. The transaction usually does not permit a buyer to apply for and get a loan approved for the particular property Instead, it requires the buyer to come up with cash for the entire purchase price. Said another way, liquidation value is more of fire sale approach, and it will be less than market value. The average consumer does not always know this and may be deceived by the appraised value.
In conclusion, these are just a couple of issues that make the process of buying and selling real estate complicated and sometimes can catch the average person off guard. For those having concerns about these or other confusing issues, I recommend that they solicit the services of a real estate professional, whether it be a broker or an appraiser. A few dollars invested with a true professional can be worth many dollars in savings when compared to that of going it alone.
Charlie W. Elliott Jr., MAI, SRA, is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889 or visit his company’s Web site, www.appraisalsanywhere.com.
