Dear Heather,

We want to sell our house and get something bigger (we have seen something we like), but we have invested a lot of money in upgrades. We are not prepared to sell it for less than we paid for it together with the upgrades. Our agent has brought us several offers close to asking price but we feel that we will be giving it away at less than asking price. What should we do?

In a Conundrum

Dear In a Conundrum,

I know it is very hard to grasp that in this property market the value of homes has fallen by as much as 30 per cent, but unfortunately it is the truth. The good news for you is that the value of the larger home you are looking at will have fallen as well. Therefore, you will need to borrow less today in order to buy the same house than you would have several years ago.

Likewise, if you are looking at downsizing, the smaller property you are looking at buying will cost less too, so it is all relative.

The fact is, the amount of money you want or need for your property has no correlation to what the market dictates it’s worth. For instance, I might want or need $1 million. However, that doesn’t mean my house is worth that much money. A home’s value is determined by two factors a) what someone is prepared to pay for it, and b) what the bank appraises it for.

The appraisal is an all-important step in the home selling process. Any buyer who is applying for financing will need to go to the bank. The bank will only finance about 70 per cent of the home’s value as determined by an appraisal (not the offer and acceptance price). A real estate appraisal is simply that — the expert opinion of a certified, licenced professional who determines the value of a piece of property.

If your $995,000 home is only appraised at $950,000, then unfortunately in the eyes of the lender your home is overpriced. Once the appraisal is received, it will be scrutinised in-house. Sometimes the value the bank assesses it at is not even as much as the appraised value.

The home appraisal is a no-nonsense factor in a decision that is often emotional for both the seller and the buyer. A motivated seller should get a professional home appraisal done within one month before putting the house on the market.

Coming on the market at the right price will help ensure a quicker sale and a smoother transaction. This is particularly important if the seller has already picked out their new home. Be transparent with the agent you have commissioned to sell your house. If you have seen something privately or through another agent, let them know (it happens). Be totally up front about money, motivation and time frame. They are there to help you, and they want to do the best job for you. However, it’s very hard for them to do so if you don’t fill them in on the big picture.

For the buyer, a home appraisal protects the bank from lending against a property that’s worth less than they’ve invested. It also protects the buyer from paying too much for a house simply because it was love at first sight.

There are two primary appraisal methods for residential property. In the sales comparison approach, the appraiser compares the property with three or four similar homes that have sold in the area, often called comparables, or comps. The analysis considers specific components, such as lot size, square footage of finished and unfinished space, style and age of house, as well as other features such as garages and fireplaces.

The cost approach is used more for new property and is based on rebuild costs. The appraiser estimates the cost to replace the structure on the property if it were destroyed. The appraiser then looks at land value and depreciation to determine the property’s worth.

Now you learn that your home is valued at $950,000 — a full $45,000 lower than your asking price! The lender won’t loan more than the appraisal, and even if they are in a strong position, the buyer will question why they should pay over the appraised price. So what do you do?

From the lender’s standpoint, the mortgage transaction is at a standstill. Perhaps you, the seller, will lower to the appraised price. Rarely will the homebuyer be willing to increase their cash down payment (even if they are in a position to) in this market.

It’s possible that both buyer and seller can negotiate compromises that will satisfy the lender. If, however, negotiations fall through and the appraisal is still too far below what the bank is willing to finance, then there’s no choice but to cancel the transaction. The buyer probably signed a sale and purchase contract, stating their offer for the property is subject to a loan contingency. This is a statement that allows the buyer to cancel the contract and receive any deposit paid to the seller as they are unable to qualify to buy the property at the agreed terms. A home appraisal is more than just another cost added to the bottom line. It’s a protection for everyone involved in the home-buying process. It will help sellers be realistic about how much their home will sell for, and buyers make a more informed decision about purchasing a home. If as a seller, you feel the appraised value is lower than you can accept, then this may not be the time for you to sell, as trying to achieve a higher price in this market may be unrealistic.

Heather Chilvers is among Coldwell Banker Bermuda Realty’s leading sales representatives. She has been working in real estate for 25 years. If you have a question for Heather, please contact her at hchilvers@brcl.bm or 332-1793. All questions will be answered confidentially.

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