Suzanne Plewes, RE/MAX Alliance in Loveland
Home values are rising! Bidding wars and homes selling for above asking price are great news for home sellers. However, it’s important to note that how much a buyer is willing to pay may not necessarily be how much you can sell for. Why? Appraisals do not always keep up with how quickly the market is moving.
What are appraisals?
Appraisals are reports that compare your home to recently sold and comparable properties (“comps”). It identifies a specific market value for your home based on acceptable mathematical approaches evaluating the differences between your home and the chosen comps. Banks use appraisals to confirm that the value against which they are providing a mortgage is justified.
What happens when appraisals come in short?
If the appraised value of a home is less than the purchase price, this could cause a financing issue with the buyer. For example, if a buyer qualifies to purchase a $400,000 home with 5% down, the mortgage amount will be $380,000 and the buyer’s down payment will be $20,000. The bank will only lend 95% of the purchase price or appraised value, whichever is lower. If the appraised value is only $380,000, this means the bank will only lend $361,000. The buyer must therefore come up with $39,000 if they’d like to purchase the home for the agreed price. This is not always possible for buyers to do, in which case, the deal may fall through.
Possible solutions to low appraised values
When appraisals come in lower than the purchase price, the potential solutions depend on the circumstances of both buyer and seller. The buyer may be able to increase their loan percentage, if they qualify. The seller may agree lower the price to make up some or all of the difference. If a solution cannot be reached, the deal will typically fall through.
Why appraisals don’t always reflect current market conditions
Since appraisers compare historical sales (usually within the last six months) to determine market price, it’s possible that the market is changing more quickly than the sales data show. For instance, if the demand for homes have skyrocketed in the last two months, it’s unlikely that those homes have already closed and are available to be used immediately as comps. This month’s new listings will be used as comps for sales three or more months later. Thus, appraisals always trail slightly behind the market when prices are on the rise.
Low appraisals can often ruin deals when sellers are unwilling to adjust their price and/or home buyers are unable to cover any of the shortage themselves. Cash buyers can be extremely appealing to sellers in this market since appraisals are not needed when a mortgage is not involved. Unfortunately, this puts regular home buyers at a disadvantage in competing in a hot market.
Whether the issue relates to appraisals or other aspects of the home buying process, working with an experienced agent can help. Your agent may devise creative solutions and help you make educated decisions on both the buying and selling side of the transaction.
Suzanne Plewes is a broker associate at RE/MAX Alliance. Write to 750 W. Eisenhower Blvd., Loveland, CO 80537, call 970.290.0373 or e-mail [email protected].
