When referring to real estate, there are different types of appraisals. An appraisal is the value given to a real estate property. In Texas, we have county appraisal districts. They are government departments created to determine property values for the purpose of taxation. The amount a homeowner pays in taxes is a percentage of the appraised property value decided by the appraisal district. The percentages are decided by the taxing entities, including the county, city, school district, mud district and other government entities.
As property values rise, the appraisal district values tend to rise also, but they aren’t always equal to market value. Many homeowners and homebuyers mistakenly believe that the tax appraisal values are the value of what their home is worth. Tax Appraisal districts can be lower than market value. This is a benefit to the homeowner because your taxes are lower. They can also be higher than market value, which is when you can protest your tax bill at the appraisal district.
What is market value? Market value of real estate is the amount which a real estate property can be sold for in the local market. We like to say that market value is what a buyer is willing to pay for a real estate property. Real estate markets can change in a matter of months and property tax values are reviewed only once a year through the tax appraisal district. You can see that these numbers will not always match up. Another reason why appraisal district values are off is because of the amount of information available to the county appraisal district. When you purchase a property you will receive a letter from the appraisal district asking you to provide voluntary information about the amount of money you paid for your home. This provides the appraisal district with information to assist them in determining property values. You are not required to return that form. If you choose to protest your taxes because they are too high, you can use the settlement statement from when you purchased the property to show them that you paid less than the assessed value, and they will usually lower the value, therefore lowering your taxes for that tax year.
When listing a home for sale, as Realtors we use the information we have available through the Multiple Listing Service. We compare the subject home to other homes in the area that have sold over the past 6 months. From that information, we can determine what buyers have been willing to pay for those homes and that becomes the estimated market value.
When a home is under contract and a buyer is using a loan to purchase it, the lender, mortgage company, will require that the buyer pays for an appraisal ordered by the lender. This is a different type of appraisal than that of the county appraisal district. A lender appraisal is done by a licensed appraiser who is paid by the buyer to determine an accurate property value for the home. A financial institution does not want to loan more money on a property, than it is worth. This reduces their risk in the case that a home is foreclosed on. They are preventing a loss of profit, if the buyer eventually defaults on the loan. Having the appraisal benefits the buyer as well, because it prevents a buyer from paying too much for a home and being unable to sell it for the amount that they owe in the future.
A financial institution has a preferred list of appraisers that they agree to work with. These professionals have differing methods and opinions on how to complete their job. Therefore, appraisals can turn out differently depending on which appraiser does the work. There was a property I sold, where the sellers had 2 appraisals done over the couple of years that they owned the home. The buyers and sellers agreed to a contract for $250,000 which, according to the sellers was exactly in between the 2 appraisals they had gotten.
A situation that arises regularly in the real estate industry, is that buyers are willing to pay an amount for a property and the lender appraisal does not equal or exceed the amount the buyers are willing to pay. This becomes a problem. At that point in a transaction, a buyer can choose to cancel the contract or bring more cash to the closing. The lender will not lend more money than the appraiser says the house is worth. Another solution, is that the seller agrees to lower the sales price of the home to match the appraisal value. This is the most common scenario.
None of this is a concern when a cash buyer is involved. Typically a cash buyer will not order an appraisal.
Have you ever gotten a home equity loan or a reverse mortgage? When you apply for these types of loans, your home already has equity and you are using it as collateral to back up your new loan. You are taking money from the equity of your home to use for another purpose. The bank wants to loan you money because they will make a profit from the interest on the loan and they have your home as collateral if you default. An appraisal that is ordered for these types of loans can be drastically different than market value. As a warning, please do not borrow every dollar you can from the equity of your home, because if you decide to sell within a couple of years, you may not be able to sell it for what you still owe on the home. If you choose to sell it anyway, you will have to come up with cash at closing to pay off the remainder of the loan or sell your home as a short sale which is very bad for your credit, almost as bad as a foreclosure.
Please consider that appraisal values are going to differ depending on the circumstance and the benefit that the parties will receive from the appraisal. Always keep this in mind when considering your homes appraised value. Please know that it could vary at least $10,000 under or over the appraised value at any given time.
Daiquiri Beebe is a Huntsville resident and realtor with Abby Realty.