As housing prices around North Texas steadily inflate, thunderstruck consumers are questioning how homes could possibly be worth what the market is dictating right now. Market watchers and economists assure us that the growth we’re experiencing now can be expected to continue for at least the next 2-5 years. But that still leaves consumers wondering how home values are determined.
For most homebuyers, lender-ordered appraisals are critical. Buying a house at or near appraisal value both assures buyers that the price they are paying is fair, and it also makes it easier to get the type of loan they want. To determine the value of property, appraisers evaluate the neighborhood, the site where the home is located, and the structure itself. Appraisers will then consider a variety of approaches to use to determine the value of the home. The first method consumers think of is the Sales Comparison Approach. This method compares the subject home to similar homes recently sold nearby. In addition to sales data, appraisers consider how many available homes are nearby and what market conditions exist in the neighborhood and in the geographic area. Among the criteria the appraiser evaluates are things like the style of home, condition, and improvements. Appraisers will also take a Cost Approach in neighborhoods where construction is ongoing or where empty lots are still available. The Cost Approach considers how much it would cost to build a similar property on an available lot. Finally, in some cases appraisers will look at the income potential of a property if it will be used as a rental. In established neighborhoods, the Cost Approach and the Income Approach are seldom used or needed to determine value.
In very competitive markets, it is good for buyers to remember that appraisers have to be somewhat conservative in determining value. Even if there are buyers who are willing to pay more than appraised value, the appraiser has to work with available data and ultimately not the end result of a bidding war. So while buyers may be willing to pay more than appraised value, the bank making the loan may not be willing to elevate their risk that much.
Cash offers and buyers willing to pay over asking price do ultimately impact future appraisal values, but because those sales are atypical, their impact is felt a few months behind the current market.
Your MetroTex REALTOR is a great resource to help you determine the fair market value of a home. If you are interested in buying or selling a home, go to www.dfwrealestate.com for the most trusted, local and accurate information on the housing market in North Texas.