One of the most commonly misunderstood things about the Denver real estate market is how the value of a home is measured. Denver home values can be determined by using either the market value or appraisal value method. Many factors go into each of these methods but only one is partially driven by emotion. A Comparative Market Analysis or CMA, offered by Realtors to Buyers and Sellers, is often more a reflection of market value than appraised value. Make sure you ask for a CMA before you decide to buy or sell your next Denver home.
So, can there be a great difference between market value and appraised value? In a more stable market, there really should not be a great variance between the two. In a sellers’ market you might often see the market value of a home be higher than the homes actual appraised value. This happens when there are more buyers than homes available and nicer homes receive multiple offers. In a buyers’ market it is possible to see the appraised value of a home come in higher than the market value. This might happen if there are too many homes on the market and a lower number of buyers. Typically, buyers have their pick of homes in this market environment and Sellers are eager to sell their homes ahead of their competition. Tough, negotiating buyers will offer less and demand more.
Market value is the price that a buyer is willing to pay for your property. The interesting thing about market value is that it really reflects desirability. In today’s Denver Homes market this translates into stainless steel appliances, granite or custom stone countertops, cherry or maple cabinets, stone or wood floors, a professionally finished basement, and views. For years I have always explained market value as more like being “perceived value”, value perceived through emotions and point of reference. When a buyer walks into a home and “falls in love” it’s always an emotional response to something. Point of reference is what you’re used to and reflects how you might compare things.
Appraised value is what an appraiser determines your home is worth. This is an unbiased opinion of price and determines how much a bank will lend you to purchase this particular home. An appraiser uses a variety of factors to appraise your home. These include but may not be limited to location, upgrades, and historical data of recently sold homes in your neighborhood. A few years ago that meant looking at homes that sold within the last 6 to 12 months. Today that means looking at sold homes in the last three months and within a shorter distance from the listed property. A mortgage lender won’t lend the buyer more than the appraised value. So if the purchase contract is more than the appraisal value, the buyer would need to come up with the difference. Alternatively, if your Realtor has done their job, there is an appraisal contingency in your contract which provides the buyer with a way out of the contract without the loss of earnest money.
Comparative Market Analysis or CMA
As the name suggests, a CMA compares the value of your home with similarly appointed homes in your neighborhood. The data, combined with a value for upgrades and/or additions, help to give an accurate picture of your home’s worth. Similar to “market value”, a CMA is market based information gathered by looking at comparable properties within a specific period of time. A typical CMA lists properties side by side as a means to compare the size of the home, number of bedrooms and baths, basement type and finish, lot desirability, views, and upgrades. A good CMA is an accurate measure of your home’s worth.
This brings to mind a home that I sold in Highlands Ranch a few years back. We were in a somewhat stable market, maybe leaning a little towards a buyers’ market. I had found a gorgeous home in a Highlands Ranch neighborhood that I thought my buyers would just love. It was a favorite floor plan of a particular builder and the same plan could be commonly found in other parts of the Ranch. Higher end subdivisions showed sales of the same floor plan selling for higher prices. This is yet more proof that location prevails above all else.
After seeing many homes, my clients felt this one stood out for a few reasons. In their price range, this home afforded them the WOW factor they could not find in any other home priced the same. This Highlands Ranch home had some amazing views but was still priced grossly higher than similarly appointed homes in the same neighborhood. And most of those had finished basements where this one did not. This was considered a more moderately priced area and yet this home was priced even higher than the same floor plan in the higher end neighborhoods. Justification for the price difference were the “million dollar views” this home offered. Despite popular belief, “million dollar views” do not equate to a $100,000 to $150,000 price difference. Being that location is once again the prevailing factor here, this was not a good measure for assessing this homes value.
I advised my clients of the comps but they were emotionally vested in the home at this point. I recall they were not happy with my assessment of the value and they even argued they should pay more for the home. Looking out for their best interest, I reviewed the comps with them again and once again explained the state of the Denver market at that time. After lengthy discussions and some negotiating with the sellers, they came to an agreement in price. This was a bit less than the asking price but still significantly higher than it should have been. My clients’ point of reference and emotional investment in the home led them to purchase the house well above market value, despite comparable sales in the area.
As I expected, the appraisal came back lower than the list price. Arguments between the appraiser and the listing agent ensued. My clients believed that the house was worth the higher price and so they came up with the difference between the appraised value and the agreed upon sales price. They set a precedent and this became the highest priced home in the neighborhood.
Three years later my clients put the home on the market. Having paid close to $700,000 they were going to take a significant loss anyway due to the downturn in our market, but they also had to account for the gross price difference they originally paid. Sadly, they lost quite a bit of money on the sale.
If a home is overpriced, paying more than it’s worth is not often advisable. As with everything else, however, there are exceptions to every situation. If you are purchasing a home and you intend to live there for a very long time, perhaps the relatively small investment is worth a lifetime of happiness. Of course you have to be in a financial position to be able to afford the larger down payment. And you must be willing to take the loss should you be forced to move due to an unexpected change in finances or windfall relocation.
Ultimately it is sometimes the “idea” of a lifestyle that people sometimes buy into, not the actual home. It’s important not to let emotions take over your decision and always pay attention to the comps. Information gathered through the use of a CMA should be a good start in answering some of your questions regarding the value of a property.