A reader finds that online valuations and bank appraisals are putting him upside down in his house.
"I am just a Regular Guy that is trying to find out if any of these online websites are telling the truth ... . I look at Zillow.com, RealEstateABC.com, Ditech.com, BofA.com, Reply.com, Cyberhomes.com, and get all different prices for our home. Don't know who to believe. Three years ago our home was appraised for $410,000, 3-4 months ago we tried to refinance our house and it came in at $330,000 on one appraisal and $365,000 on other. After it appraised at $410,000 we put in a pool, work shop and other upgrades for a total of $119,000. Now we are upside down in our house -- how can this be?"
Realty Times responds:
Dear Regular Guy, you're learning that appraisals, online home valuations, Realtor comparable market analysis reports (CMAs,) and broker price opinions (BPOs) can differ widely. The reason is that they use different data points, including opinion. You think they should all be the same because they should all rely on sold data. In a perfect world, home prices should be the same no matter which website you visit, but that will never be the case.
The numbers you see on these real estate sites come from public records, which only reflect sold properties and occasionally, some for-sale data. Depending on when a home was sold to the owner, the owner may be paying thousands less in taxes and have a much lower appraisal based on the market value at the time they purchased. The reason is most communities have ceilings on how fast they can raise property taxes. If you bought recently, you are paying the most recent tax assessment, while your neighbor could be paying thousands less per year. That's why public records aren't enough to form an analysis.
Each home is unique, and each appraiser, broker, and online tekkie has their own personal or business formula for coming up with the "right" number. The right number can mean many things -- the sales price at which a listing will sell, the sales price that will tell a lender it's okay to loan money to purchase or refinance the home, or the value that a home has at a certain point in time -- just for fun.
That's why real estate transactions have checks and balances that are supposed to protect all parties in the transaction -- the lender, the buyer, the seller, and the agents representing the buyer and seller. Lenders don't rely on agents' ideas of what a home is worth based on the listing price. They want to protect their buyer borrower from overpaying. If the buyer overpays, the buyer is more likely to default on the loan. If the buyer is upside-down, as you believe you are, they are more likely to walk away from the home. No lender wants defaults.
Agents don't intentionally overprice or underprice homes. They attempt to price homes for sale as closely to the actual figure it will sell for as possible. If a home languishes on the market due to overaggressive pricing, the agent looks bad and the seller looks worse. However, many agents succumb to pressures from sellers to list their homes too high.
The online valuation sites are fun, but they don't bring much accuracy to the party, and for a transaction, accuracy is what is sorely needed. Would you buy a home that is priced from $300,000 to $400,000? You'd make an offer for $300,000, wouldn't you? But what if the seller was expecting multiple bids? She might expect offers to be closer to $400,000. That's why a clear asking price is helpful to both parties.
What worries me about your situation is that you seemed to magically come up with the money you needed to refinance your home in order to make capital improvements. How did you get your home to appraise for $410,000 when other appraisers comped it for $80,000 and $45,000 less, respectively? That's a pretty wide margin, even for different appraisers.
You may also learn the hard way that buyers value homes and home improvements differently. If they really want a pool, they're willing to pay for one. If they plan to fill your pool in with dirt, then it becomes a major cost that will devalue your home in their eyes. Don't count on making a profit or even getting what you paid for your pool and workshop when you sell, unless you are fortunate enough to find a buyer who values those improvements.
Another thing to keep in mind is that homes depreciate, which is why they need constant maintenance and improvements. Condition also impacts values.
My guess is that the appraisers didn't use the same comparables for their reports. While some may use the local street address, others may use a different criteria such as the type of home as a comparable.
That happened recently in my neighborhood. A neighbor who was selling her townhome was shocked by how low the appraisal was when it came in. The appraiser used comparables from the same builder, over two miles away. When the Realtor hired her own appraiser, she came up with a completely different result using only comparables from the same street. My friend's home just sold for slightly less than the Realtor had projected via the MLS asking price, but it was thousands more than the first appraiser had valued the home.
Unless you are looking to sell or want to protest your property taxes, don't fret over what your home is worth online. What matters is that you are enjoying living there, that you can afford your home and the improvements you've made, and that your home remains attractive enough to lure buyers when you need to sell.
Keep in mind that the best Realtor in the world can't get you more for your home than it's worth in the current market. Your market may be rapidly changing and homes may be losing value, but that could also be temporary. The best protection for your investment is to keep the house in good repair and live in your home long enough to build equity.
