Kokomo Home Appraisal Goes Down!

Dear Betty,

We bought our home in Kokomo a little over two years ago. It was brand new and we got a really good deal on it. The builder was leaving Kokomo and slashed the prices on their last few houses. It appraised for almost $20,000 more than we paid for it!

Now we want to refinance and we had to get an appraisal. We got the appraisal back and it says our house appraises for $10,000 less now than when we bought it two years ago.

How can that be? Something has to be wrong!

Bewildered Homeowner

Dear Bewildered,

First, let me explain a little about what an appraisal is and how your current appraisal can be less than the one done when you bought the house two years ago.

An appraisal is an estimate of “fair market value” for a home at a certain point in time. Fair market value is what a buyer might pay – or a seller might receive – for a home at a certain point in time.

You may be thinking, “But I’m not trying to sell my home, I just want to refinance it.”

You are right; but your lender has to look at your house from the stand point of its “fair market value” in case you default on your loan and they have to take it back and sell it.

An appraisal has two purposes:

• to protect you from spending/borrowing too much on a home
• to protect the lender from loaning more money than a home is worth (This applies in your case – the lender protecting themselves.)

There are several steps in an appraisal. Perhaps the most important step is using what are called comparable properties or “comps” to estimate the “fair market value” of a home.

“Comps” are properties that have sold in the recent past. They are located in the same area and are similar in size, age, style, amenities, etc. Ideally the homes have sold within the past three to six months. The key here is homes that have sold – not houses that are for sale now; not houses that were on the market and didn’t sell; but houses that actually sold!

Now to your 2 appraisals…

Appraisal 1 – 2007

Let’s say you closed on your house June 1, 2007. When your house was appraised, the comparable homes had to sell between December 2006 and May 2007 – three to six months prior to your June 1 closing. The appraised value was based on homes similar to yours that sold before you closed on your home.

Appraisal 2 – 2009

Now, fast forward to August 1, 2009. You know you got a good deal on your house and you know it appraised for much more than you paid two years ago. But this appraisal for your refinance was based on home sales of similar homes in the past six months – homes sold between February 2009 and July 2009.

Why has the appraised value of your home gone down?

There are several reasons why the “market value” of your home and every other home in Kokomo has gone down:

• General economic down-turn
• Fewer homes selling
• Discounted prices on foreclosures
• Unemployment or fear of unemployment
• Fewer buyers qualify for financing

It may not be any consolation to you; but you are in a much better position than many homeowners in the Kokomo area. Your home is still worth more than you paid for it and what you owe on it. Most homeowners (including me), who bought in the past 5-6 years, have lost “market value” on their homes. We can’t sell our homes for what we paid for them. And depending on how much equity we have in the house, can’t refinance them either.