Your Real Estate Insider: What are houses really worth?

What are houses really worth?

I am working for some buyers, and we currently have a home under contract. The home is a bank owned foreclosure. The buyers are getting a great deal. I am a real estate agent but i am also a general contractor that builds and sells new homes. The purchase price of the home is well below the amount it would cost a contractor to build it. That is understandable, it is a foreclosure and the banks want to get it off of their books. The appraisal came in at exactly the purchase price. I had assumed it was going to come in way higher, atleast what it would cost to build. This scares me. If homes are appraising for less than they cost to build, we have a bigger problem than i thought. Part of me thinks that it appraised for that exact amount because the appraiser kept it as low as possible without hurting the deal. Does anyone have an opinion about this or a similar story? If so let me know. Thanks Aaron Poling

7 comments • Aaron Poling • April 02 2009 10:07PM

Comments

Hi Aaron. Market value are below construction costs and, until the backlog of depreciated homes is cleared, it will be that way for a while. I know this will hold some real challenges for builders. I am working with a couple of them and I think they may need to consider holding off for a while until the market improves.

New homes always carry a bit of a premium price, but you can't sell new homes if resales are a much better deal.

Posted by Bob Foster (Century 21 Lanthorn R. E. Ltd. Belleville, Ontario) about 3 years ago

Appraisals almost never come in over contract price.  I advise my clients of this up front because many hope to use the appraised value as a sign they got a "good deal".

Posted by Richard T Dolbeare, R(B), ABR, CRS, RSPS BS/MS - Engineering Hawaii Dreams Today (Keller Williams Realty) about 3 years ago

We see lots of home priced way below construction costs which in our area in Prescott, AZ, is about $130 per square.

Banks also price properties in unique and various ways too.  Don't try and get too logical on them.  See: 

Why Do Banks Price REOs All Over the Place.

Thanks for sharing!

:) PS

Posted by Patrick Schutte, Prescott AZ REO Specialist (Prescott Premier Properties) about 3 years ago

Appraisers always make the case that, if the house is already built and is not in great shape, it will be 'less valuable' (than if you built a new one, the same size) (this goes well beyond regular depreciation, as some homes are in really bad shape).

What a house is worth is what someone is willing to pay for it, and in this market, the bigger the supply, the more banks play with the asking price, and the less buyers are willing to offer.

Hopefully things will turn around soon.

Posted by Sylvie Conde, Broker | Toronto Real Estate (Sutton Group-Associates Realty Inc., Brokerage) about 3 years ago

Walter - I believe a lot of Appraisers take the easy way out. They know what the listing price is, they usually know what the offer price is. That makes it easy for them - There is a buyer willing to pay xxx amount for this house it must be worth that amount. To answer the question in the title of your blog - Its worth what the next guy will pay!!

Posted by Dan Callahan (Callahan's Home Inspections) about 3 years ago

In our market, homes are selling far below the cost of construction.  The majority of sales are "bank owned" or "short sales".  Until these properties are "broomed" we will never see home prices above construction cost levels.  New construction here is DEAD.

Posted by Tom Boos (Sine & Monaghan Realtors, Real Living) about 3 years ago

I agree with Dan.  Prices are based on the market (except in the case of distresses.)  How many times do you see two houses listed for the same price---one has a nearly maintenance-free exterior, little to no landscaping, structurally sound, clean and uncluttered, the other requires lots of outside maintenance and has limited but beautiful landscaping.  Equally sound, clean and uncluttered.

Personally, I'd offer more for the nearly maintenance-free exterior than the one that is more esthetically pleasing.  Why? Because I know that my husband will rip out most of that landscaping in a heartbeat, no matter how beautiful it is.  He likes to make it his own. 

Another buyer might pay more for the second home because it looks more "ready to move in."  The "worth" is in the eye of the beholder.

Posted by Mary Ann Miller (Long and Foster) about 3 years ago

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