Profile picture for Teav

Is it reasonable for me to counter at the market value if the seller thinks they have priced to sell

I recently had the home appraised that I am currently renting. I am considering purchasing the home, which has not been listed yet. The home owner has indicated to me that they are pricing to sell at $500K, but I wanted to get a sense of the market value before I move forward with a loan application (plus their asking price seemed a bit high given the market has fallen 9% in this neighborhood in the last 12 months). I already know that I qualify for the amount they are asking, but the appraisal I received is 18% less than their asking price! The market value appraisal came out to $409K and the Cost Approach was $441K. 
Now that I have an appraisal, is it reasonable for me to counter at the market value even if the seller thinks they are already "priced to sell"? What is the difference between market value/sales comparison appraisal and the cost approach? 
  • October 01 2011 - Lake Oswego
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Answers (10)

Profile picture for Ofe Polack
Hi Teav, it was a great idea for you to have an appraisal done, now all you need to do is to write an offer backed by the appraisal.  Ultimately the lender will also have an appraisal done and will only lend you the amount reflected on their appraisal.  Maybe when the seller sees the appraisal he will agree to sell you the property at that price.  Good luck!
  • October 02 2011
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Profile picture for nwhome.us

It is not unusual for parties to use appraisals to begin negotiations on the purchase price of a piece of property and its improvements.  Typically each party will get their own appraisal.

The cost basis of an appraisal is based on an estimate that the appraiser makes of what it would take to rebuild the improvements in today's market.  It is usually not held with much weight in that bids for the reconstruction are not required and that depreciation is factored into the cost.  It is a very subjective approach to value.

The third element of the appraisal should have been an income approach.  This is what Pasadean is referring to which involves a calculation that is usually used in commercial property to determine value by the amount of income that a property generates.  I'm not a great fan of this calculation for residential property (and it usually is not included in residential appraisal) because some investors like a 4% CAP rate and others won't entertain anything less than 12%.  Trying to get a straight answer from your seller seems unlikely and unless they have experience in commercial property it just won't make a lot of sense to them.

You have indicated that you are emotionally attached to the home, and there is value in that.  The best way for a seller to get the most return on their investment is to place the property on the open market and let it be seen by as many people as possible.  If you can convince your seller (an emotional appeal) to get their own appraisal and place a value on your own emotional attachment, you should be able to reach a compromise.  If you can't value your own attachment, or feel that the seller is not being reasonable about their own assessment of value, you need to be able to walk away and understand that the ownership of this home may not be the right thing.



  • October 02 2011
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Profile picture for sunnyview
I salute you for getting an appraisal instead of just jumping in on the house you are renting out of emotional attatchment. That is great to hear.

You can definitely offer less. Personally, I would counter at no more than the market value appraisal. The cost basis valuation is used more for insurance purposes form what I know and is not what lenders use. They will not lend more than the market value and do not care what it would cost to rebuild the house. Explain to owner that you cannot get a loan for more than the house will appraise for so that is why you are offering that amount.
  • October 02 2011
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The cost approach is what it would cost to replicatethe property (as the appraiser for a more detailed explanation.

And you are absolutely justified in offering less, not the least of which is because the seller won't be paying a real estate commission. If you go it alone, be sure to retain an attorney. $400k-$500k is a lot of money.
  • October 02 2011
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I would counter at the lower price. You are also protected with that loan and appraisal contingency. The loan won't even go through if the bank appraisal comes in much lower as well.
  • October 02 2011
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Profile picture for blue screen exile
Just curious; how is your present rent comparing to a mortgage plus taxes, insurance, maintenance, ...

If you offer lower, will the owner just keep the property and try to keep renting it to you?  Do you think the owner will try to raise the rents on you to see if you will leave?

If the owner wants to sell, the owner has to consider what will work best for them, and what the actual market is presently, not what it was a few years ago.

If you know what the math is from the owner's perspective, you will be in a better position to negotiate, and come up with a solution that works for both of you.
  • October 02 2011
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Profile picture for hpvanc
Teav,

Kudos on your effort to remain logically objective and hiring the professional you needed to do so, instead of going to a salesperson.  I think you already know that it is not going to appraise for the price your landlord wants.  Do keep in mind that another appraisal my be slightly higher or lower, since you seem to have a good relationship with your lender ask them what kind of range they vary by in your area.  Do you know if your landlord needs to sell, or if they are just testing the waters in the hope of getting what they want?  It seems to me you have a couple of strategies you can pursue:

    1.    You can offer below $400K and hope that they counter, as you approach $409K you can let them know about your appraisal and stand firm.  There is no guaranty that they will even counter, or if they do that they are prepared to accept and sell near the appraised value. 

    2.    Offer close to $409K and let them know about and send a copy of the appraisal with your offer.  You still have the risk that they are not prepared to accept the realities of the market and may withdraw the property from the market or decide to hold out for an uninformed cash buyer.

Good luck.
  • October 01 2011
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Thanks for your question "Teav".  Yes.  That is your answer to your question.  One should ask themselves, how did the seller come up with that price?  Don't you thing "priced to sell" is not a literal term, rather a marketing gimmick?  I recommend doing a BMA (buyer's market analysis) for all of my buyers but if you were willing to go one step further and get an appraisal that is even better!  How can the seller argue?  The next appraisal will come in close from the next buyer if the seller turns you away.  Plus, what do you have to lose?  Wayne Gretzky says,  "you miss 100% of the shots you don't take" so SHOOT!

Hope this helps, good luck!
  • October 01 2011
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Profile picture for Teav
Thanks for your comments SoCal.

I paid a licensed appraiser to evaluate the house. I used an appraiser that was recommended to me by my loan officer (this is who they typically use). I know it is unconventional to solicit an appraisal prior to the purchase, but because I am emotionally attached to house, I wanted to get an objective market assessment of the value before I move forward. 
  • October 01 2011
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Profile picture for SoCal Engr
To your first question, if you have reason to believe that the product is not worth the price being asked, then it is always reasonable to offer less. What the seller thinks only comes into play in their assessment of your offer - and if you become emotionally invested in the property.

I'll let the pro's handle trying to explain the difference between CMA and "cost approach".

Question: When you say "appraisal", does this mean you paid an independent appraiser for an appraisal, or is this the term used by an REA?
  • October 01 2011
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