I’ve been a Realtor in the California Bay Area for 20 Yrs and the most common question I get from all sides is “How much is this home worth?” Home Owners want to know much equity they have or how much they can get for their home if they sell it. Prospective Buyers want to make sure they’re paying the right price for whatever home they’re considering purchasing.
Can We Calculate a Fair Market Value of a Home?
And while the Home Owner and the Prospective Buyer have diametrically opposed biases regarding the value, a price needs to be agreed upon by both sides for a sale to ultimately happen.
A common perception is that a neutral 3rd party, the “appraiser”, is the perfect arbiter to establish an objective value that’s unbiased. But the reality is that in a “Sale” appraisal, all the appraiser is doing is looking at what the Buyer agreed to pay for the property and trying to see if they can come up with a “good argument for that price”, based on the most recent Sale comps and reasonable adjustments for differences. And an appraiser will often stretch the appraisal adjustment guidelines as far as they can in order to find that reasonable argument to give it the value (the price that the Buyer has agreed to pay). Failing to find it, they will at least get the appraisal price to be as close to the purchase price as they possibly can.
While this may seem like an ugly truth about appraisals, it speaks to the fact that appraisers recognize the ultimate truth about what “really” is the value of any given property. Each given property is unique in itself, even in the case where differences (between it and other nearby properties that have recently sold) are seemingly “minor”. And in most cases, the differences are many and some of those differences are “major”.
Thus, ultimately, the value of any given property “right now” is the most than any given Buyer is “willing” AND “able” to pay for that property “right now”. And in parts of the country like the Bay Area, where demand perpetually exceeds supply and a plethora of Buyers have high salaries and large down payments saved up, that reality plays out in spades. While it’s great to understand a “range” of “appraisable” value of any given property prior to making an offer, that won’t matter much in multiple offer situations where you have no way to know how badly the other bidders want that house and/or how strong they are financially.
Thus, in the end, until any given house is ultimately sold, we all need to be comfortable with the fact that we don’t really know what our house/property is worth. The best we can do in the mean time is to gain a vague understanding of a “likely range of value” from an analysis of the most recent nearby Sale comparables and the differences between those Sale comps and our own house/property.