This is a topic of great importance in today's changing real estate market and one that we will continue to cover here at LouisvilleHomesBlog.com consistently. Back in March, we asked Joe Manausa, who covers Tallahassee Real Estate, to look at this topic and he responded with, How To Find the Value of Your Louisville Home, which highlights the different ways in which a home can be valued. Just last month I wrote Determining Home Values, Zillow 'Zestimates' Are Fraught With Danger that warns against the dangers of using free online data to create a home value without digging deeper and unearthing all the additional, related facts. Today, I'm going to reference an incredible piece written by Steve Harney that looks at the current mortgage landscape and how the bank's appraiser and his report affects buyers and sellers in a real estate transaction.

How Banks Look at Home Value

Banks look at homes value differently than buyers do. A buyer finds their favorite home in their price range then wants to know, "What is this Louisville home worth?" The bank, however, looks at the risk/reward of the mortgage. They want to analyze all the data before agreeing to offer a buyer a loan. In the past, the buyer's credit was of paramount importance. While that's still a factor, the increased number of loan defaults is playing a much larger role.

The number of people defaulting on their mortgage payments is currently ten times greater than historical levels. Some borrowers are even 'walking away' from their mortgage obligation even if they have the financial resources to pay. There is currently a greater chance that the bank will have to foreclose on a loan. That makes the appraised value of the home (the collateral behind the loan) more important. We have seen banks become more conservative with appraisals because of this.

Wow. That's a huge number! And greatly affects how banks look at mortgages. Harney's piece goes on to describe how distressed sales are affecting the appraiser's assessment of property worth.

There were very few distressed property sales (foreclosure or short sales) five years ago. Distressed properties make up over twenty five percent of all homes sold today. The homes used as comparables by appraisers to establish value today reflect this change. More and more distressed properties are entering the 'mix' of properties being used as comparables. The distressed properties sell for less. The result is lowered appraisal values when they are used as comparables.

My experience is that appraisals are coming in lower than in past years. Appraisers here in Louisville do appear to be including distressed properties as part of their comparables.

Solid Advice to Louisville Buyers and Sellers

The bottom line is that the value of something is more than just what someone is willing to pay you for it. Unless you're willing to pay the full amount in cash, anticipating what role the bank will play in your buying or selling becomes increasingly important. I can't say this enough: It's never been more important for home buyers or sellers to have a Realtor on their side that understands the changing market. For sale by owners (FISBOs) face greater challenges and buyers that choose to "go it alone" do so at their own peril. I recommend reading Harney's entire post and the comments are worthwhile as well.