Pricing is always a major issue for Sellers and Buyers alike.The one golden rule about pricing is that the localized real estate market will control the market value of the property. Market value is an elusive thing that we all search for in determining list price as well as offering price.

Real estate value is extremely localized. When we read in the paper about the overall real estate market and its pricing, that may or may not have any relevance to the localized market you are looking at. You’ve probably heard the old adage: “The three most important things about real estate is location, location, location” There is a reason this trite saying persists after all these years; it’s true.

In the area of the city in which I live, a house on one side of a major roadway may be up to $1 million more expensive than the same size house on the other side of the roadway. Also, gated communities tend to have their own valuation within a larger area. In order to get a good idea of value, you have to compare sales of houses that are most like the house you are trying to price. Location is the one thing you cannot change about a home.

Appraisals can be a good tool to gauge market value. However, I have found that the appraisal process is not an exact science and the goal of an appraisal is to determine market value of a particular piece of property at a certain point in time. Market value usually assumes a willing buyer and a willing seller, neither of which are under any duress to perform under the contract. This is typically known as an arm’s length transaction. (Although this term may have different connotations in contract law in various states).

The basic flaw in the appraisal process that I see is that it relies on historical data to forecast a present or future value of a particular property. When the real estate market is in a pronounced acceleration mode (prices increasing quickly) the appraisals rarely keep up with the current value of the property.

This is problematic for buyers who are financing because their loan will be based upon some percentage of appraised value. In an accelerating market, the appraisal will most likely come in lower than purchase price because it is based upon sales that happened 6 months earlier. The buyer will not be able to get a loan for the purchase price of the property unless they are willing and able to come to the table with cash to make up the difference between the lagging appraisal value and the current market value of the property.

It’s problematic for sellers as well. They may find that they are in the unenviable position of seeing a deal fall apart or forced to reduce their sales price to the value of the appraisal that came in substantially lower than asking price.

Valuation is not a static number and will continue to evolve with the changing market conditions. It is like trying to hit a moving target, much like the overall real estate market trends.

In dealing with issues of valuation, whether you are a buyer or a seller, it is imperative that you enlist the assistance of a professional in the real estate field. They can provide you with the right kind of information to help you make the right decision on selling or buying your next property.