In the real world, very few individuals
order appraisal reports to establish an offering price or to substantiate
a purchase price. At the point that an offer to purchase (in a typical
residential transaction) is made, the price has been set by other parties,
not the purchaser. The price has been determined by the seller, who
wishes to obtain the highest price possible, or the agent, who receives
a percentage of the price as compensation and often represents the seller
in the transaction.
The real estate agent will typically perform
a comparative market analysis (CMA). The appraisal laws in most states
allow real estate agents to perform CMAs without an appraiser's license
or certification. A CMA is a necessary part of the agent's preparation
for a listing and consists of examining sales of properties in the area
to arrive at a listing price. The reliability of the CMA depends upon
the agent's experience and the characteristics of the property. The
agent will suggest a selling price to the seller based upon the analysis.
However, neither the seller nor the agent are bound by the results of
the analysis, and the agent is not required to follow any formal procedure
in completing the CMA. If a seller wishes to list the property at a
price higher than the price suggested by the agent, then the agent may
be forced to accept the listing at that price or risk losing a commission.
Purchasers believe that they are getting
a good deal if they make an offer lower than the listed price. But how
far above the market value was the property listed? 10%, 15%, maybe
even 20% above the fair market value? A negotiated price of 10% less
than the listed price on a property that was listed at 20% above its
value is not a bargain. The agent cannot tell the purchaser that the
offered price is higher than the value, or even higher than their own
CMA. In most states, they must submit the offer to the seller.
The seller of a property may want to order
an appraisal before listing the property. Of course, the cost of the
appraisal is always a deterrent, especially if the seller knows that
a buyer will pay for it when applying for a loan. But the appraisal
is often justified. The seller could lose a sale if the property appraised
for less than the sale price when appraised by the appraiser.