What is the Difference Between a Appraisals & Comparable Property Sales
Home Value Secrets Unveiled!
Readers will learn the difference between appraisals and comparable property sales in determining home value.
The article explains the purpose, process, and limitations of appraisals.
It highlights how comparable property sales provide market-based insights, factors considered, and limitations.
When it comes to determining the value of your home, two essential factors come into play: appraisals and comparable property sales. They seem similar – and they are – but they are not the same and mean different things to banks and buyers.
In this article, we'll explore the difference between appraisals and comparable property sales – highlighting their benefits and limitations. Understanding these two approaches will hopefully empower you to make informed decisions; when it comes to pricing your home, negotiating a successful sale, or refinancing your mortgage.
An appraisal is a professional assessment of a property's fair market value conducted by a licensed appraiser, providing a comprehensive evaluation based on specific details. On the other hand, comparable property sales involve analyzing recent sales of similar properties in the area to gauge market response, trends, and demand.
Appraisals: An Expert Assessment
An appraisal is a professional assessment of the fair market value of a property, by a licensed appraiser. An appraisal is an unbiased professional opinion.
Here's what you need to know:
Purpose and Process of an Appraisal
Appraisals are typically required by lenders to determine the value of a home when you purchase a home or if you are refinancing an existing one. Most appraisals are done to satisfy mortgages that a property is worth the loan on it.
Appraisers consider many different factors in their software: a home's condition, square footage, location, upgrades, comparable sales, and even market conditions all go into affecting the final value. They use a standardized approach to (ideally) arrive at an unbiased opinion of value.
Licensing of a Real Estate Appraiser
Appraisers must be licensed in each state they work in. In our state of Maryland they must complete 300 hours of coursework, have a bachelors degree, and work for at least 18 months under a current appraiser completing at least 3,000 hours of appraisal work. (I'll tell you that's a ton more time spent learning vs real estate agents...)
They follow specific guidelines and ethical standards to provide objective and accurate evaluations of properties. Our country learned it’s lessons of the 2009 residential market crash and tightened all standards for appraisers.
Property-Specific Evaluation
Appraisals focus on the unique characteristics of your property. Appraisers conduct on-site visits to inspect your home, assess its condition, and note any significant features or upgrades. Today we are seeing the inspection process be split up from the ‘office work’ of the appraisal – an individual (not a licensed appraiser) will go out and take pictures and get dimensions. Then send them in to an appraiser to complete the work faster.
Individualized analysis on every house helps provide a value based on your home's specific attributes.
Lender Requirement
Lenders rely on appraisals to determine the loan amount they are willing to go to. The appraisal assures the lender that the property's value supports the loan. And in the event of a default, they are comfortable that they will receive their money if they were to foreclose and resell the home.
Limitations
Appraisals have limitations as they represent a single professional's opinion. Factors such as the appraiser's experience, available data, and individual judgment can influence the final value.
Additionally, appraisals may not reflect the current market conditions accurately. In a quickly rising market – like we had in 2020-2022 we saw property values jumping wen by week. An appraiser can only use comparable homes that have settled already. So there is some delay between ‘current market value’ and the appraised value an appraiser can support.
Comparable Property Sales: Market-Based Insights
Comparable property sales, also known as "comps," provide insights into the market value of your home. Comps are probably the biggest and best driver of what a home is going to sell for. Anyone can pull the comps for a home.
You don’t need to be in the real estate business to do it – but knowing what to look for is important. Most of the time a comparable property sales are used by real estate agents to give their clients their expert opinion on what a home is worth on the market currently.
Here’s what you need to know:
Market Comparison
Comparable property sales involve analyzing recent sales of similar properties in your area. Real estate agents and potential home sellers use this information to gauge the market's response to similar homes.
Factors Considered
When evaluating comps, factors such as location, size, condition, amenities, and recent upgrades are taken into account. The goal is to find properties similar to yours that have recently sold. Their sale prices and speed of sale is some of the best intel out there.
Market Trends and Demand
Comps help identify market trends and the demand for properties similar to yours. By examining the sale prices and market time of comparable properties, you can gauge buyer interest and competition. If you can see that every home in a neighborhood has sold for more each month, you can figure out roughly at what price a home should be listed.
Flexibility and Adaptability
Comparable property sales provide a snapshot of the market, but they don't consider the specific features or condition of your home. As a seller, you have the flexibility to adjust your price based on the feedback and competition from similar properties. You can be a little flexible in deciding what buyers may be attracted towards.
Limitations
While comparable property sales provide valuable insights, they may not capture all aspects that make your home unique. The condition, upgrades, or specific location factors may not be fully reflected in the comps. A comp only tells you what they were selling for. If the market has turned, or interest rates have changed, you might get less or more than you expected.
The Difference Between a Appraisals & Comparable Property Sales
Both appraisals and comparable property sales offer valuable information when determining the value of your home.
Comparable property sales, on the other hand, offer insights into market trends and the prices at which similar properties have sold.
Utilizing these approaches can help you arrive at a well-informed and realistic value for your home. Consult with a trusted real estate agent or appraiser to leverage these methods effectively, ultimately aiding in a successful home sale.