How Homes are Valued
Homes are valued a lot like everything else: They are worth what people will pay for them. The Maybach Exelero, the most expensive car in the world, sells for $8 million because that's what people will pay for it. By the same token, you can ask for $8 million for your Hyundai, Ford or Chrysler, but don't count on getting it – you'll get what the market says it's worth.
So, how do we know what a willing buyer will spend for a house? Although we may never be certain, by looking at the recent past, we can come up with a pretty good idea. This is why the market value of a house is based on sold homes that are comparable in various ways.
In other words, it doesn't matter what amount Tom, the next-door neighbor, lists his house for. The only thing that matters is what Jessica, your former neighbor, got for her house. List prices are fantasies while sold prices are reality.
Determining an accurate asking price for your home is vital, and the best way to find that price is by having the home professionally appraised. The second best way is to ask a real estate agent for a comparative market analysis. While both the appraiser and the real estate agent use the prices of sold homes as a basis, the appraisal process is a bit more in-depth.
Licensed appraisers aren't house experts, but they are analysts, able to pull together myriad facts and statistics to arrive at a home's value.
To avoid a conflict of interest, most lenders adhere to the Home Valuation Code of Conduct (HVCC) and use the services of an appraisal management company.
The First Step in the Appraisal Process
Shortly after you've accepted an offer to purchase, you'll receive a call from the appraiser to set up an appointment to see the home. The time he or she spends inspecting the home varies, depending on the appraiser, but plan on it taking at least 30 minutes.
The appraiser makes note of the floor plan and any improvements, and takes measurements of the exterior of the home to determine the square footage.
The appraiser uses statistics from the multiple listing service, public records, or a combination of both to find recently closed sales that are similar in age, size, location and features to your home. Typically, the appraiser relies on sales within the last 90 days, but may go back as far as six months. She will also use homes within a 1-mile radius of yours.
The Final Steps
The final steps of the appraisal involve comparing your house, which the appraiser calls the "subject," to the comparable homes. She'll use a list of criteria that includes the age of the homes, size, number of bedrooms and bathrooms, location and any improvements made to the homes.
She'll add or subtract value from your home depending on how it stacks up to the comparable houses until she arrives at the market value of your home.
What to Do if You Disagree With the Appraisal
An appraisal obtained by the lender is paid for by, and therefore belongs to, the buyer. So the lender won't send you, as the seller, a copy. It is up to the buyer to supply you with a copy if he or she is willing.
That said, if the appraised value is determined to be lower than what the buyer has agreed to pay, the lender will typically not lend on the property and the buyer and seller have some decisions to make.
The buyer can come up with a larger down payment (which brings down the amount of money he needs to borrow). Most buyers think long and hard about this option – nobody wants to overpay for a house.
The seller and the buyer can agree to split the amount that is over the appraised value, with the buyer bringing half the cash to the deal and the seller lowering the price of the home to meet his half of the deal.
Another option, and the one most commonly used, is that the seller lowers the price of the house to meet the appraiser's evaluation.
Finally, the seller can simply walk away from the deal.
Before any of these steps are taken, however, the buyer and the seller should review the appraisal to ensure that the appraiser used accurate information in his determination. Appraisers are human and do make mistakes. If errors are found, the buyer can notify the lender and ask for another appraisal.
Budgeting to Buy a House
No matter how good the credit rating, today's home buyer no longer has the luxury of buying with little or zero down. Unless you are low-income with good credit, or a veteran, no-down loans are also a thing of the past. There is the USDA RD loan that is still a 100% financing with no money down loan.
Most lenders today want at least 20 percent of the loan amount as a down payment on a house. For a home priced between $168,300 and $287,500, a home buyer would need to come up with between $33,660 and $57,500 just for a down payment. Then, there are closing costs to consider. These vary by state, but figure you'll pay over $2,000 on a $200,000 loan.
Saving up this money takes time and careful planning. The best way to start is by coming up with a budget that is realistic enough for you to stick with and by using other tips to help you get ahead financially.
The only thing more challenging than setting up the budget is sticking with it over the long run. Using personal finance software will help you set it up, but only self-discipline and the desire for a new house will motivate you to stick with it.
First, you need to determine your total income from all sources. The second step is to list all the money that goes out every month, beginning with your fixed expenses. These include anything that has a fixed payment due every month, including:
Rent or mortgage (if you have a fixed rate).
Child support and alimony.
Installment loan payments.
Next, list your variable expenses. These may be a little more difficult to track, so you may want to document them over the course of a week or two on a chart such as the spreadsheet offered for free by a Canadian credit counseling service. Common variable expenses include:
Cable or satellite TV.
Anything you purchase on a daily basis (morning coffee, etc.).
Amy Fontinelle, writing at Investopedia, suggests that you track and update your budget daily so that nothing falls through the cracks.
Once you've used the budget for a month or two you'll be able to see where your money goes every week. This snapshot shows you where it's being wasted and, thus, where to make cuts. Any items cut from the budget mean more money to set aside for your house.
Some of these cutbacks might include bringing a lunch from home rather than hitting the café every day, riding your bike to work instead of driving or taking a cab, and using coupons to save money.
Make More Money
Cutting your budget expenditures and paying down debt aren't the only ways to move more quickly down the road toward home ownership. Finding ways to bring in more money gives your plan a turbo boost.
If you can take on overtime hours at work, do it. Consider holding a garage sale or selling unused items online. Sock away that extra cash for your down payment.
If you're like a lot of us, you may be tempted to use the money you're saving for something else that comes along. To avoid the temptation, put it in an online savings account that makes it difficult to withdraw. If you have to wait a few days for the money, you may think twice about withdrawing it.
As you build your savings, avoid the urge to add to your debt. There will be plenty of time after you buy the house to buy furniture, a car or whatever else you might be thinking of purchasing. Keep that house you want top-of-mind to motivate yourself to stay out of debt and continue saving.