1. An appraisal isn’t an exact science
When appraisers evaluate a home’s value, they’re giving their best opinion based on how the home’s features stack up against those of similar homes recently sold nearby. One appraiser may factor in a recent sale, but another may consider that sale too long ago, or the home too different, or too far away to be a fair comparison. The result can be differences in the values two separate appraisers set for your home.
2. Appraisals have different purposes
An appraisal being used to figure out how much to insure your home for or to determine your property taxes may rely on other factors and arrive at different values. For example, though an appraisal for a home loan evaluates today’s market value, an appraisal for insurance purposes calculates what it would cost to rebuild your home at today’s building material and labor rates, which can result in two different numbers.
Appraisals are also different from CMAs, or competitive market analyses. In a CMA, a real estate agent relies on market expertise to estimate how much your home will sell for in a specific time period. The price your home will sell for in 30 days may be different than the price your home will sell for in 120 days. Because real estate agents don’t follow the rules appraisers do, there can be variations between CMAs and appraisals on the same home.
3. An appraisal is a snapshot
Home prices shift, and appraised values will shift with those market changes. Your home may be appraised at $150,000 today, but in two months when you refinance or list it for sale, the appraised value could be lower or higher depending on how your market has performed.
4. Appraisals don’t factor in your personal issues
You may have a reason you must sell immediately, such as a job loss or transfer, which can affect the amount of money you’ll accept to complete the transaction in your time frame. An appraisal doesn’t consider those personal factors.
5. You can ask for a second opinion
If your home appraisal comes back at a value you believe is too low, you can request that a second appraisal be performed by a different appraiser. You, or potential buyers, if they’ve requested the appraisal, will have to pay for the second appraisal. But it may be worth it to keep the sale from collapsing from a faulty appraisal. On the other hand, the appraisal may be accurate, and it may be a sign that you need to adjust your pricing or the size of the loan you’re refinancing.
The housing market has changed a lot over the last 40 years, with the number of home sales, the size of homes, and the cost of homes all changing since the 1970s. Check out this great infographic below to see the ups, and downs, of the housing market over the last 40 years.
The current rate of household formation in the United States is still well below the expected trend and faulted as a major culprit for “pent-up demand.” According to an analysis by Trulia, an online residential real estate site, potentially 2.4 million households are hitting the pause button. The majority of that number is comprised of young people between the ages of 18 and 34 who have delayed moving out on their own for a variety of reasons.
An average of 1.1 million new households are formed each year in the United States. But from the first quarter of 2008 to the first quarter of 2011, just 450,000 new households have been added on an annual basis. This sluggish rate means a decrease in the overall demand for housing, which affects the annual construction rate. But this “pent-up demand” driven by young adults who are still living at home or doubling up with roommates is bound to give way, say some housing experts.
Will household formation increase sooner or later? Housing Wire is optimistic, reporting that the conditions are better today for emerging households. Steady job growth over the last several years is a good sign. Sterne Agee analyst Jay McCanless says, “We believe steady, if unremarkable, monthly job growth is creating a…household formation environment for 2013 which should support our positive housing outlook.”
If that projection holds true, increased demand is merely a matter of time. When households come out of hiding looking for single- and multi-family residences or apartments, they could potentially inundate the market.
The question on so many home buyer’s minds is, “is it time to buy?” In some circumstances it is. For those requiring a mortgage, the rates available today would indicate it’s time.
As a seller, this is why it is important to price at market value. The longer you stay on market, the buyer pool of your home may shrink due to these rates.
When you move into a neighborhood with an association, you are agreeing to abide by certain rules, and you acknowledge that rule breakers may face financial consequences. Understanding the association’s rules and your rights and responsibilities as a homeowner will facilitate harmonious living.
Whether you call it a homeowners association, a community association, or a common interest community, these names can confuse new homeowners, but the concept of all three entities is similar:
- The association is a legal entity registered with the state of Nevada and was created at the onset of your neighborhood’s construction.
- Its responsibility is to maintain your neighborhood’s common areas.
- It has the right to enforce deed restrictions on your home.
In Washington, associations have been established in newer neighborhoods and condominium and townhome developments. Your home may have more than one homeowners association if it’s located in a planned community.
Understand the Rule Book
Your association’s rules are found in the “Covenants, Conditions and Restrictions” (CC&Rs) and other governing documents. Per the law, the seller or builder provides you with these documents at the time of purchase, and they become part of your home’s title.
CC&Rs describe a variety of items, such as how residents are elected to your association board, meeting rules, dues, home maintenance requirements, pre-approvals for changes to your property, restrictions on your home’s use, and fines. They also describe the association’s responsibilities for the maintenance of common areas, like parks, pools, a gated entrance, or landscaping.
The rules can vary greatly by association. Some communities are age restricted and require residents to be of a minimum age. Others may designate a specific area for adults only, while others may provide a pre-approved desert paint palette that will prevent you from painting your craftsman-style home in neon polka dots. Some rules will prevent you from turning your home into a rental or will limit the number or size of pets. Fines of different amounts may be levied on those who do not follow the rules.
- Because the rules can vary, it is essential to read and understand all CC&Rs before you buy your home.
- If you do not agree with them, it is simple — do not buy in that neighborhood.
When Problems Arise
Problems can arise even when you understand the rules. Perhaps a neighbor files a complaint or you are notified of a possible violation. CC&Rs list the protocol for conflict resolution: who to contact and how to appeal a violation or fine.
Like policy-based governance, a homeowners association only has the rights that are set forth in its CC&Rs. They cannot make up new rules. If this kind of management concerns you, you may want to consider buying a single-family home where there are fewer, less stringent or no restrictions at all.
Complications arise when home is underwater
If a couple is not married when they purchase a house, the possibility of a future split looms large, and they should agree before the purchase on how the house will be handled if it occurs. If they can’t agree on that, they should reconsider whether they want to live together.
If a couple is married when they purchase the house, the presumption is that they will remain together, and deciding on how they will divide the house if they split is the last thing they want to think about. Nonetheless, the issues that arise with a split are the same whether the split is anticipated beforehand or not. The difference is that agreement is much easier and less costly if done beforehand when the relationship is warm.
Selling the house is the way to a quick and clean break: The only issue is deciding how the proceeds are to be divided, although this can be quite contentious when it is not agreed upon beforehand. Unless the couple can agree to accept the judgment of a neutral third party, it will have to be delegated to lawyers to negotiate, at which points the costs begin to mount.
One approach a third party could use is to divide the net proceeds according to each party’s contribution to the equity in the house when it is sold.
Suppose, for example, that the couple paid $100,000 for a house, took a mortgage of $80,000, paid $20,000 down plus $3,000 in settlement costs, and sells it after five years when the loan balance is $74,000. Total contributions of the parties to equity in the house at the time of sale consist of $23,000 in cash at purchase, plus $6,000 in reducing the loan balance. If one party contributed 60 percent of the cash and paid 40 percent of the expenses, that party’s share of net proceeds would be [0.6(23,000) + 0.4(6,000)] divided by 29,000, or 56 percent.
When one party retains the house, it can get complicated: Very often one of the parties wants to remain in the house. In such case, the cleanest approach is to have the remaining party pay the departing party the latter’s share of the net property value. This requires that the remaining party have the cash needed for that purpose. The two parties must also agree on how their respective ownership shares are to be calculated, and how the house will be valued. Since the property is not being sold, its value must be based on an appraisal, which requires the parties to agree on who will select the appraiser, who will pay for it, and whether marketing costs will be deducted from the valuation.
A clean break also requires that the departing party be removed from any existing mortgage obligation. This means that the remaining party must have the income and credit required to refinance the mortgage in her own name.
When one party retains the house but cannot pay off the one who leaves: Usually, the party remaining in the house doesn’t have the money to pay off the party leaving the house. The more equity they have in the house, the more cash the resident party needs for that purpose. A home equity loan is not possible unless both parties become responsible, which is the last thing the departing party wants.
Taking the departing partner off the hook: In most cases that I encounter, the party leaving the house is less concerned with his claim to equity in the house than in obtaining relief from liability on the mortgage. Many departing parties believe erroneously that they are off the hook if the party remaining in the house agrees in writing to assume full responsibility for the mortgage. They overlook the fact that the lender is not a partner to their agreement. Departing partners remain liable for their mortgages unless the lender agrees to remove them.
Lenders have no incentive to remove one party from the mortgage. Some can be induced to do it if the partner remaining with the house has a perfect payment record and can document that they are solely responsible for the payments. But in the best situation this takes time, perhaps a year or longer.
The most equitable resolution: If I were drafting an agreement for a loved one, not knowing whether they were more likely to be the remaining or the departing party, it would grant the remaining party 14 months to make the settlement payment, and to remove the departing party from the mortgage. Otherwise, the house must be sold and the mortgage paid off.
Complications introduced by a declining market: If the house is worth less than the mortgage balance when the couple split, which is very possible if they purchased in 2005-2007 and split today, the options are grim. The house can’t be sold unless the parties pay the deficiency. If neither wants to remain in the house and make the payments, the alternative is foreclosure, which will destroy the credit of both parties. If one party wants to stay in the house and continue to make the payments, the party that leaves avoids foreclosure but will remain liable for the mortgage indefinitely.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.