One of the biggest questions people have when wanting to sell their home is how to determine what their home is worth. Some homeowners will hire a professional appraiser to get the value of their home to determine what they should list their home.

Is this a wise move? I don’t think so. I think that you could be throwing $500 away, the average cost of an appraisal, by getting an appraisal before you sell your home. Let me explain.

Usually when an appraiser is called out to do an appraisal, it is either for a purchase in which the lender needs to justify the price that the buyer is paying, or a refinance in which the lender needs to justify that there is enough equity to finance that property.

Let’s go deeper into this.

When someone buys a home, if there is financing on the property purchase, the lender needs to make sure that there will be enough equity and that the buyers are not over-paying and the lender is not over-lending on the home. Why does the lender care? Because it’s their money and they take on a huge risk on over-encumbered properties.

Anyone remember the housing meltdown we had from 2006 to 2012? It had to do with unqualified buyers buying homes they could not afford, and homes that were over-valued and over-encumbered to the point where there was no wiggle room or margin for error.

So if a buyer buys a home for $500,000 and puts $100,000 as a down-payment, they would be putting 20% down and you would think that if they were to default on the loan, that the lender would be ok because they have $100,000 in equity, probably enough to cover back payments, attorney and foreclosure costs. The risk for the lender would be minimal in this case.

Well, what if the home was really only worth $400,000 based on an appraisal? The lender would be up the creek with astronomical losses because there was never any wiggle room or margin for error if they lent $400,000 on a sales price of $500,000 because it is only worth $400,000.

But the fact is that the lender would not lend on the home based on a $500,000 sales price that the buyer and seller agreed to, they would lend based on the appraised value of the home. In this case, they would lend on 80% of the appraised value and the buyer would need to come up with the difference or have to cancel the sale.

The same concept goes for those who want to refinance a home. A lender needs to do an appraisal to make sure that there is enough equity in the event of a default.

But it goes even deeper than this. Although appraisers will many times disagree with what I am about to say, I have been around the business enough (27+ years) to know that many appraisers will go out and give a valuation of the home based on what the home sold for, or based on what a lender needs in equity if it is worth at least the amount needed. In fact, when an appraiser goes out to do a value analysis, they ask for the sales price and if the property is worth at least that price, they will usually come it right at value. It’s not a coincidence; they are only there to justify value. Whether appraisers agree with what I am saying or not, it is what we have seen in the industry since the beginning of time.

It is not necessarily a bad thing as long as the home is worth what the buyer is paying. And in many cases I have seen an appraisal come in much higher than the sales price, but most of the time an appraisal needs to justify the actual sales price as stated above.

Again, the same goes for a refinance.

So why not get an appraisal to determine the value of your home before you list?

Because an appraiser does not go inside the homes that are in your neighborhood to compare it to your home. Most of the time they have not gone inside the sold properties in your neighborhood to compare it to your home. They do not talk to other agents to monitor interest in a particular street or town. They have not been to open houses to see what the market is doing and what buyers and other agents are saying.  Appraisers deal with numbers, stats and pictures of other homes.

The same thing goes for many of the online valuations that exist today like Zillow and Trulia. Although they are a great resource of information, they are not going to homes, talking to buyers, sellers and agents every day either. They are only dealing in numbers and stats and probably do not have their finger on the pulse of your local real estate market.

But a qualified REALTOR® does this every day. They talk to other buyers, sellers and agents to gauge the market activity and values. They know about the great schools in your neighborhood and also are aware of other neighborhood issues that affect the value or desirability in your neighborhood that an appraiser may not be aware of.

And more importantly, the true definition of market value is what a willing buyer and willing seller agree to buy and sell the home for with neither party being under duress. In hot markets, buyers are willing to pay a premium to live in your neighborhood regardless of what the last comparable sale would suggest. In a softer market, buyers are not always willing to pay what the last comparable sale was in your neighborhood if there has been a market shift.

Then there is the issue of multiple offers in which several buyers are making an offer to buy a particular property and there are numerous offers on the home. Multiple offers create a sort of “feeding frenzy” which many times ends up having the home sell for much higher than the asking price.

If you have an appraisal done before you list your home and it comes in at $500,000 and people were thinking of offering $550,000 but now they are being told it is worth much less, how would you explain that to the buyer?

The fact is that the appraisal system is a good one, and it works. It works to justify a value and also when someone needs to get an appraisal for a probate sale or some other matter, which requires an estimated valuation. Appraisers are a very important sector of the real estate business. But you do not need an appraiser to determine at what price you should list your home. In almost any market, your best bet is to save your $500 and hire a good real estate professional who will know and understand your neighborhood and price your property right to begin with so that you end up getting probably a lot more then what an appraiser says you should get.

Simply put, the real estate market will ultimately determine what your home is worth.