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Vol 3:1 What Market Value Isn't

Did it surprise you to learn that your property assessment value is not a reliable indicator of your home’s market value? I’m referring, of course, to the story of the distressed homeowner in last month’s May You Burn in Hell If You are Lying post who learned this lesson in a hard way.

I get how property assessment can fall out of step with market value - when was the last time you had a real live assessment officer in your home taking the true measure of its condition?

I find it intriguing, however, that the appraised value of your home is not a reliable indicator of its market value either.

Appraisals for New Mortgages Lenders typically order an appraisal when a buyer has 20% or more to put down on the mortgage and is able to sidestep the mortgage default insurance that buyers with less to put down are required to purchase. When there is no insurance of this kind in place, lenders typically go that extra mile in making sure that they will be able to cover any losses in the event of a foreclosure. An appraisal undertaken for this purpose, therefore, has a tendency to err on the side of caution.

Which right away puts appraised value at odds with market value since the bare-bones definition of market value is what someone will pay for something, period. It frequently comes to pass in situations of new mortgage applications, however, that the appraisal comes in below the agreed-upon purchase price.

This happened to a client of mine who was trying to buy a home in the red-hot sellers market that sprang up last spring in the $300,000 - $400,000 range. Competition was fierce and they ended up having to compete with 13 other buyers in order get the house they wanted. You can just imagine how far above asking price they had to bid in order to come out on top.

Because my clients were planning a 20% down payment, their lender ordered an appraisal and when it came in several thousand dollars lower than the agreed-upon purchase price, my clients had to decide between making up the difference in cash or letting it go to another buyer.

They paid the difference in cash.

Fortunately, we had prepared for this possibility so there was no financial or psychological fallout.

Appraisals for Refinancing

A scenario that few homeowners are prepared for, however, occurs when an appraisal has been undertaken on their home for the purpose of mortgage refinancing and the appraisal amount proves later to be an unreliable indicator of their home’s market value.

Once you (and your lender) own that home, your interests and theirs are more in alignment and an appraisal for the purposes of refinancing tends lean in the other direction, toward supporting their decision to lend to you in the first place. Within certain parameters, it is in the lender’s best interests to use refinancing to bring greater stability to your financial life or to access funds for the purpose of undertaking repairs or renovations.

A Kiss-of-Death Renovation And that brings me, finally, to the story of the 1-bedroom bungalow - talk about a renovation you want to think twice about. Reducing the number of bedrooms in a home, with rare exceptions, automatically decreases its market value. A 3-bedroom bungalow, for example, is inherently more valuable than a 2-bedroom bungalow because it serves the needs of a greater percentage of buyers. And reducing from 2 bedrooms to one?

The kiss of death.

Last year, a colleague asked me to host an open house for her - a smallish, pretty 1-bedroom bungalow in East Kildonan that had been languishing on the market for a couple of months. It used to be a 2-bedroom, but the owner preferred one large bedroom over 2 smaller ones and removed the adjoining wall.

There are very few 1-bedroom homes in the city and very little demand for them - it’s one of those chicken-egg things. As part of my preparation for hosting the open house, I looked into the sales history of 1-bedroom bungalows in the neighborhood. As I had expected, there almost wasn’t one.

The open house was poorly attended and as its appointed time was drawing to a close, the homeowner, a young professional woman, returned home. We struck up a conversation as I was packing up to leave and she eventually asked for my opinion as to why the house wasn’t selling.

While other remedies might also be available, one thing that is always true in a case like this is that the asking price is too high. The young woman was very resistant to this idea and when I asked her what made her so sure that her house was worth what she was asking, she went to her desk and pulled a bank appraisal out of her drawer.

The beautiful thing about being able to get your eyes on an actual appraisal (which isn’t as easy as you think) is that you can see, and take your measure of, the appraiser’s evidence - which properties he or she is using to back up their dollar figure as well as what adjustments have been made to account for differences between the comparables and the subject property.

Knowing what I knew about how little market evidence was available, I was really curious to see what evidence the appraiser was basing the appraisal value on.

And guess what? There wasn’t a single 1-bedroom bungalow on the list – all three “comparable” properties were 2-bedroom bungalows. 1- and 2-bedroom bungalows are even further apart than the proverbial apples and oranges, so not only was I surprised to see these but I was also surprised to see them used as is with no adjustments made for the loss of the second bedroom in the subject property.

I understand the circumstances under which a lender would deem this appraisal acceptable, but it should have been explained to the homeowner that it was for the express purpose of helping her refinance and might have no legs as an actual market price.

In the absence of her trusted lender explaining this, however, the word of a Realtor she had just met wasn’t very convincing and the homeowner stuck to her guns - when the house did finally sell, it was for considerably less than its appraised value. The irony is that had she been willing to put the wall back, restoring her home to its 2-bedroom status, she would likely have sold it for at or near its appraised value.

The Moral of the Story

The moral of the story of appraisals – as it is with assessments– is that neither are necessarily a true reflection of market value.

If you want to know what your home’s market value is, as well as what you can do to enhance it, ask a Realtor to personally inspect and then perform a comparative market analysis (CMA) on your home.

And don’t just settle for a number. First of all, market value is a range, not a single number, and secondly, it should be accompanied by evidence. It takes skill and experience to perform a CMA, but it isn’t rocket science and should be easily explained and understood.

If you have any feedback, questions or need help with a real estate matter, please get in touch. Likewise, if you or someone you know is interested in having a Comparative Market Analysis (CMA) performed, please contact me at (204) 979-0640 or

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