OT - Real estate value - appraised vs fair market vs sale vs asking price

Ok, so scenario is, I've been living in a house that we rent from a family friend. We originally moved in under a "verbal land contract"....which amounts to "we intend to purchase" but the current owner has a mortgage that doesn't allow a formal land contract. In that, we took responsibility for repairs on the property (though I specified that without being a legal owner, I would not replace furnace / AC / roof / etc large repairs). Basically, I said that I'd treat the house as my own...and I have...to an extent. I have made repairs such as water heater, basic code violations, etc. Where I have shorted, is that I need to get the garage insulated, furnace / ac installed, lots of improvements to the house, etc...stuff that I'm not going to do until the note is in our name.

We are almost to the point that we are ready to do a conventional sale with the owner. We've lived in the house for six months...and what that ultimately means is that I've found all of the issues. I've got a good page of electrical code violations. A smaller list of mechanical violations. Some other issues such as a shed that was installed without permit, and without a rat wall...and thus, has animals living under it.

When it was realized that we couldn't do a legal land contract, we stopped working on a transfer price. It was simply renting with intent.

Now, the owner has an idea of value based upon a listing real estate agent walk through. Further, he knows what he has to get to break even. I have an idea of value after searching sold properties through a friends MLS account. My question would be, how should I determine an actual sale price, based upon what the house would actually sell for, in a reasonable amount of time on the market. I ask that because the "appraisals" I've seen have always been ridiculously inflated. They take in to account perfect situations, not the fact that the bathrooms are dated with broken fixtures, the kitchen is dated with broken fixtures, and the whole house is at that 75% "home handyman" stage, where things were fixed, but never finished (and mostly, never done correctly). Not to mention the landscaping which was just let go for at least three years.

I have zero intent of screwing the current owner, as he's a good guy, but I also have no intent to take it on the chin, knowing full damn well that I have a lot of work to do once we purchase. This is a business transaction, through and through...and should be treated as one. Unfortunately, thus far we have fallen very short on that idea. We are living here with only a verbal lease, and only a history of cancelled checks, renters insurance and receipts for improvements to show legal residency.

Looks like you need a good (and somewhat impartial) way of valuing the property. Assuming for the moment that you're in a subdivision (and not sitting on a large piece of land), you should be able to see what houses in the neighborhood have been selling for over the past few months/year. From that you can extrapolate a price per square foot. If we also assume that your house has similar square footage (isn't 2x as big or small) as most other houses, you can take your price per square foot times your square footage and come up with an otherwise reasonable number. You probably won't buy the house for exactly that number, but it'll keep you in the ballpark.

Now if you've got more than a few acres or a really unique property, that's beyond anything I've ever come across. I'm sure other folks have a good way to ballpark these things.

Your just going to have to haggle. One thing I would add to the value of the house is the cost of moving. How many days off will you have to take, truck rental or movers, utilities connection fees, etc?

Eh, I can move in a weekend if I need to. I haven't moved my machine shop....one of the big motivators in getting this transaction settled.

All I really want is a realistic ballpark number of what I could sell the house for now if I had already done the landscaping / roof / furnace / baths / kitchen. I can haggle from there.

Not in a subdivision, but not overly unique either....unless you consider the upstairs floor plan which doesn't work to anyone's advantage.

I just don't want to lose toooo much money. I mean, I'm buying a house....losing money is inevitable in this day and age.


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Try Zillow.com or other such real estate sites. Talk to a realtor, that's their job to figure out those things. I understand that you may not want to use a realtor for this transaction but a consult does not oblige you to anything.

Jacques

A proper real estate appraiser, one the bank hires gives you the answer. This is never a real estate broker, ever. It is normal process for a standard mortgage, at least in my area. They need 3 comparables, houses sold recently that are similar enough that they can calculate value. They add or subtract value for neighborhood, lot size etc.

Do they add or subtract for house condition?

That is where they failed in previous situations. They'd compare one house that was fully restored to one that was failing...and then everybody had huge mortgages that were completely out of line with the real value of a house.

Take a look at some Zillow and similar listing services, and see what their valuations are like in the area, too.

As already mentioned, comps are the key in this. And those comps need to be same neighborhood, square footage, type of house, and most importantly, condition. Many comps are skewed to ready-to-sell properties, with all the little broken things fixed, and represent sale numbers after a house inspector has gone thru it noting code violations in electrical and mechanical systems, and things like no rat wall for the un-permitted shed. So, if you have comps of "no-problem" sales, then you'll have to back out all the (professional, not you) repair costs from the pie-in-the-sky price. It may be good to start getting written estimates of repairs you have found to be needed from licensed plumbers and electricians. That doesn't mean you have to end up using them, but that will define the value of the shortcomings you've found.

Years ago, we bought our first house from the landlord we were renting from. We came up with a number we would pay, but his number was a little over $20K less -- $45k or thereabouts -- so pretty cheap. We agreed to that offer, and used FHA financing. Turns out FHA has a home inspection requirement, and we as buyers were legally prevented from paying for any repairs that were needed. Repairs like a new roof for the garage, miscellaneous handrails and -- get this -- a new basement floor. Poor guy had to have the old one busted out, and new floor poured. Not a great deal for him, to be sure. Don't know the current FHA deal, but this could work to your advantage, of course.

Good luck!
Chip

In Illinois by law a seller has to disclose potential defects, particularly code violations. Some can be or are grandfathered. Whether he sells to you or anyone else, these have to be considered in a negotiated price. If the cost to correct deficiencies reduces the price below break even, is it your responsibility to make him whole?

Tom

In my experience, take Zillow with a major grain of salt. Often they are pretty close but sometimes insanely off....especially when there have been no sales of the property in the last 20 years and no good comps.

If all you want to do is come up with a fair price, you might not need a full blown appraisal, you can get a Broker's Opinion of Value. The broker isn't trying to sell/buy the property, and is paid a fixed fee, which is less than an appraisal. You should, with the seller's knowledge obviously, talk to the broker and send him/her a list of the problems so they can take them into account.

If you're paying cash, the seller is carrying the paper, or you assume the mortgage, you probably wouldn't need a full-blown appraisal. If you do new bank financing, they'll want to do their own appraisal.

What's often done in these situations is to write an appraisal contingency into the purchase and sale agreement. That way if the appraisal comes in lower than the BOV, you're covered.

The negotiations will likely be very non-existent....more like, "we'll pay this much". With that, I'd really like that price to be researched a little. If it means simply going off the appraised value, that's fine. If it means a BOV, that's cool too. I just want something that I can trust...at least a little.

An appraisal by the bank will be required for the mortgage. I just wasn't sure if these are actually accurate of the properties current condition or not. The last house we purchased was at the initial decline of the housing bust....and that definitely was not an accurate appraisal. Said because houses that were in the condition that we purchased, simply weren't selling...and houses that were selling, were new construction. How the bank appraiser came up with the numbers, I have no clue.

It's tough...because even going off another houses sale price is not going to be nearly accurate. As one would assume that the bedrooms have light switches....or built in fixtures. This is a fixer upper....plain and simple. But the fixes are expensive for the average buyer. Lots of electrical.

I do have to check if the township requires C of O inspections for property transfers. Most do nowadays. If it's anything like the others I've remedied, it'll be nasty!

In a county east of Phoenix and Mariacopa County they require the seller to pump the septic tank.

Its not all that big but just one more little money eating oh yeah.

Ill second the questionable Zillow stuff...

One thing I have learned is the selling price is only the starting point. In the little town where the wife and I are looking to relocate. most properties sell for the asking price and then they add the closing costs to the total mortgaged amount.

Another thing is you might wanna take the time to look at the county tax assessors info. Here they can be found online. It can tell you the price the last couple owners paid, the taxes for the year, sometimes permit records, year built, flood zone stuff and all kinds on interesting things you might wanna know.


Good luck

Is this going to be an owner contract loan or you will be getting a loan from a bank or credit union? Also will it be a for sale by owner or via realtors? Either way I would never buy a home with out have a full home inspection done.

Do you think the owner would split the cost of home inspection and an independent appraisal with you to come up with a price you agree too? If yes this should show you his good faith on working a deal that is fair to both of you.
If not it is really up to you up to you if you want to put this money out knowing you may not be able to come to an agreement with the current owner. Either way this home inspection will likely be more accepted by the current owner then your current list you have come up with. The list you have made may very well just offend the owner and start thing off on a bad note. The inspection 1000-$1500 depending on the Home.
It's money well spent in my opinion. Also if do this inspection before the appraisal the appraiser can take the inspection report into consideration when writing it up.

Full Disclosure I'm no expert but we do own a few homes. The last two where bought for sale by owner. This saved both party's $10-$15k each by not paying realtors fee / commission.

snowman said:

The negotiations will likely be very non-existent....more like, "we'll pay this much". With that, I'd really like that price to be researched a little. If it means simply going off the appraised value, that's fine. If it means a BOV, that's cool too. I just want something that I can trust...at least a little.

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Don't go off assessed value, those have little relation to reality. I would do a BOV or an appraisal. You're not locked into a purchase contract, so I would just get a BOV and if you're both happy with it, do the paperwork.

snowman said:

An appraisal by the bank will be required for the mortgage. I just wasn't sure if these are actually accurate of the properties current condition or not. The last house we purchased was at the initial decline of the housing bust....and that definitely was not an accurate appraisal. Said because houses that were in the condition that we purchased, simply weren't selling...and houses that were selling, were new construction. How the bank appraiser came up with the numbers, I have no clue.

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Bank appraisals can definitely be weird

snowman said:

I do have to check if the township requires C of O inspections for property transfers. Most do nowadays. If it's anything like the others I've remedied, it'll be nasty!

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I've not seen that, is it a Michigan thing?

Zillow, Trulia,, whatever other local MLS is online. County tax database will show what sell price was.
Banksters are no longer 'helping' inflate prices - the reverse more likely, as too many got burned too badly.

End of the day, though, the condition one house to the next does NOT affect valuation as much as you might expect. Affects how LONG it takes to sell a lesser one vs a nicer one, for sure.

A good deal of the value is in the LAND it sits on. Part of that value is how and where sited, not how large. Check the tax assessment and see the percentages. Not unusual for the land to be worth more than the dwelling. Need of new wiring or plumbing has no impact AT ALL on what can be 40% to 60% of the 'package'. Landscaping or lack-of usually does not matter either.

Bottom line is that need of repairs major or minor are not a huge influencer on those who write mortgages for long years. Only on how soon they expect a deal goes to 'close'.

EVERY house will need a great many things during the term of the average mortgage, and the owner is expected to JFDWT out of their own resources - not by skipping mortgage payments. Banks don't have to care.

And of course you have to negotiate. Just don't expect it to be a one-sided process, long list of flaws or otherwise.

Residences are sold 'as is'. Not how one wishes they 'is'. Part of that because buyers with long lists.. almost never implement more than a fraction of what the list said needed doin'. They just live with most of the reported flaws ....same as the last crew did.

Sellers know that. They did the same.


Bill

In my experience, a licensed real estate appraiser will evaluate relative to their best judgment of comps. If the comps were freshly dressed cream puffs, the appraiser will not be able to accurately estimate the offset for your fixer-upper. They will minimize the delta.

How about paying for a real estate appraisal, as a baseline, then get contractor bids for correcting your list of repairs and safety issues (code violations)?

In the end, how bad does the owner want to sell and how bad do you want to buy?

It maybe a good thing you can move in a weekend.

snowman said:

I do have to check if the township requires C of O inspections for property transfers. Most do nowadays. If it's anything like the others I've remedied, it'll be nasty!

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If you're getting a mortgage on it, you will almost certainly need a COO to move in. I don't think there are many lenders who will overlook that anymore.

Also, mortgage rules changed in big ways as of last October. There's a lot of new rules that are mostly a pain.

Buying a house now, and I all I can say is: make sure you have a good lawyer, and understand what the market value is. The second part was easy for me, the first part was a little harder. But my wife and I could probably sell this house the day we moved in and make money off it because we did both. Combination of the sellers being put in a corner where they have to pony up to get rid of an old septic system and connect to public sewer and the sellers wanting to move fairly quickly. The best part is they had an offer $16,000 higher that walked because (we believe, anyway) of the septic system.

It sounds like you know enough about the house, so that won't be an issue, at least.

DanielG said:

If all you want to do is come up with a fair price, you might not need a full blown appraisal, you can get a Broker's Opinion of Value. The broker isn't trying to sell/buy the property, and is paid a fixed fee, which is less than an appraisal.

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really?
that's funny I thought that is what they did for a living.


No, an appraiser, never a realtor.

Well, here's my two cents worth.

As everyone has said, finding the "true" value of that house is a complete crap shoot. If it was a nice, recently built house in great shape in a subdivision of 200 similar house, comps and appraisals will be on the money. Sounds like little of that applies to your situation. In that case, any valuation by a banker, real estate agent, appraiser, etc. is just going to be a guess and may not even be close to what it might bring in a real sale.

My suggestion would be to find comparable sold houses, check out those houses and see just how comparable they really are and make a ball park adjustment of your house's valuation. Then go ask the house owner what he is thinking on the price. He may come in with a similar number, in which case you are all set. If he comes in with a "you must be joking" number, be ready to pack up and move unless he wants to negotiate.

I'll disagree with a couple of points Bill made. A house in need of repairs, at least around here, is very much worth less. In this day and age, husband and wife both have jobs, they are busy, they don't know the difference between plumber's putty and drywall compound, they don't know any good contractors and don't care to screw around with getting a home fixed up. If they walk into a house that needs anything more that repainting a couple of rooms, they walk right out and never look back. Finding the person willing to fix it up means you have to take a lower price to get them to buy it. This is why house flippers can make money.

Good luck.
Steve