Besides satisfying your curiosity, knowing your home’s value can come in handy whether you’re litigating a legal case, dealing with estate issues, or managing an insurance claim. A home appraisal is an unbiased evaluation to determine your property’s market value. This is the second of a three-part series.
Bankruptcy or other litigation
In the event of bankruptcy or other litigation, a judge will look at a debtor’s assets to determine whether they should be liquidated to pay creditors.
If you are the debtor and an appraisal says your investment property is worth $1 million (and you own the property free and clear), chances are you’ll have to sell it and distribute the assets, or at the very least, the judge may put a lien on the property. If that same property has a loan of $1.2 million and you have no equity in it, then there is no reason to force a sale. On the other hand, the judge may allow a foreclosure or unilaterally lower the amount owed on the loan to the appraised value of property.
Retirement and estate planning
Whether you’re planning for retirement (yay!) or your demise (bummer!), you must know the value of your assets. For retirement, knowing the appraised value of your home can help you figure out how much money you’ll need during your non-working years to maintain your lifestyle and whether you might benefit from a reverse mortgage.
If you want to make sure your spouse and/or children will be financially stable after you’re gone, knowing your home’s value is an important piece of the puzzle. When you die, your assets (and debt) remain. The value of your home may be used to offset your debt, calculate estate taxes, and/or determine how assets will be split among your beneficiaries. The appraised value lets your heirs know if the property should be sold and whether there will be anything left over after debts and taxes are paid.
An appraisal can also help determine what kind and how much insurance to get. Insurance premiums are based on what you want the insurance to cover in the event of a claim. If your home is leveled by a meteor, do you simply want enough coverage to pay you the current cash value of your home as is? Do you want the appraised value plus any required building code upgrades? Or, do you want the insurance company to pay guaranteed replacement cost—to rebuild your home. These three scenarios generate three different premiums. These are discussions you can have with your insurance agent before a claim.
You may also need an appraisal after a disaster. Insurance companies are in the business of making money, so they want to pay the lowest claim possible. You, on the other hand, will want the highest possible value. An appraiser can help. After a disaster there may no longer be a house to inspect, but an appraiser’s analysis can provide a fairly accurate number for the value of the house prior to the loss.
Tell the truth
Regardless of why you need an appraisal, it’s always best to be up front about the elements that add value to your property—and those that don’t. If you want an appraisal with a higher value, you may be tempted to limit what you share with the appraiser. This is rarely wise. I recommend using the same approach with appraisals as I do with disclosures during the sale process—share anything that may affect someone’s willingness to buy the property or the price they would pay. Mention the leaky roof, the neighbor’s barking dog, and the faulty electrical system. Dishonesty often comes back to bite us in the end.
If you have questions about property management or real estate, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.