Why a Pre-Purchase Appraisal?

Thinking about buying a home?  Why a Pre-Purchase Appraisal?

This is a great question.

We get a lot of phone calls and assignments from people who are looking to find out if they are paying too much for a home.  They are concerned because the market is not easy to understand, there is not great data on line and other reasons such as a transaction that does not include a realtor on one or both sides of the “deal”.

As you probably know sources such as “Redfin” or “Zillow” can be helpful but sometimes misleading as they are essentially based on algorithm and statistical technology but cannot fully integrate all the special features a home or other sales in the neighborhood might have.  As a result, the outcome of their price determination may be helpful but less insightful when it comes to a financial decision that could affect the rest of your financial future.  If the decision is a poor one you could end up paying too much for your home and be “upside down” before even starting out.

We have seen countless examples of homeowners paying too much for their homes and often as “cash” buyers that did not require the safety net of an appraisal for a transaction that was financed and requires an appraisal by the lender.

Lenders understand the risk better than most people think.  This is the reason they generally order some form of an appraisal for every loan they make.  They are in the game to minimize risk with the intent of making sound financial decisions that are financially rewarding.  So, if a lender is doing this and they are merely using “other people’s” money shouldn’t you be even more careful when it comes to sound financial decisions that involve your hard-earned finances?  The answer becomes obvious.

Obtaining an appraisal prior to purchase cuts through the fog of possible misperceptions one may have about a property.    Did you buy the biggest home in the neighborhood only to find out its an over improvement and the price per sq.ft. should have been much lower than you paid because other market buyers wouldn’t want a home that big in that neighborhood? Is the home so over improved that you are over paying for it but if you tried to sell it again there is a high degree of probability that someone else won’t appreciate the unique features you thought added value?  Where you aware of certain market conditions in the local market that others already knew?

For instance, a non-local buyer may not be aware that the property they are considering for purchase is located near a superfund clean up site or a “cancer zone”.  These areas exist and a buyer without adequate information can wind up making a terrible decision with the best intent only to be the last one in the room holding the last straw.

This happens often and particularly in the South Florida market that is filled with some of the most honest and kind people along with a host of unscrupulous and shady characters as well.

Almost without fail and often daily we encounter homeowners that more than willing to show us unique features of their homes only to be disappointed to find out the market does not recognize a premium on those features that they personally felt it should have.

Appraisals do not consider “personal feelings” but rather gathers data to market reaction based on specific items such as location, site size, site view, construction quality, features, room count, living area and upgrades (to name a few).  Being able to determine market reaction to such items provides for support as to whether an item or feature truly brings value to home and quantifies it numerically rather than just a “feeling” that “everyone will love this, and they should pay more”.

Here is a perfect example. I know of a recent client who lives in a moderate middle-class neighborhood.  He has lived in his home for 15 years and paid it off.  He wanted to reward himself, so he installed a world class pool, spa and waterfall that cost over $75,000.  Typical pool installations in the neighborhood are between $25,000-$35,000.

We looked for other sales in the neighborhood and found a similar situation with an owner that improved his back yard with an oversize custom pool, spa, outdoor kitchen and extended Tiki home.  Side by side comparison with this sale and other comparables revealed that the premium above and beyond a home with a typical pool was only an additional premium of $7,500. The client although disappointed admitted that he built the pool for his own enjoyment and figured that the full value of the improvement might not be realized in the overall value of the home. That client was realistic and understood that he had an over improved item.

Most of the time we find that people believe cost always equals value.  Had a purchaser come to us and fell in love with that pool and wound up paying a $40,000 – $50,000 premium without a professional opinion from an appraiser they would have immediately started out $30,000-40,000 in negative equity with no clue why their home is worth less than they expected in their market.

This is but just one simple example with a host of other things we see daily.  We are constantly asked “if I do this will it add value to our home?”.  We find people pay premiums for new construction for water views only to find they really don’t live on a vibrant body of water as much as they live on a drainage ditch that comes close to over flowing and was required by zoning to meet requirements for adequate community drainage.  However, they still paid a premium beyond what will be realized on re-sale.

Have a question. Contact us and we can walk you through any potential minefields we see in determining the value of home you are considering for purchase.