Last Spring market, which ended roughly a week ago, looked something like this: buyers want to buy, sellers unsure they want to sell, plenty multiple-offer situations and many deals falling apart mid-way to closing. This is the nature of a market with rising prices.
Homeowners, believing prices will rise, stay on the sidelines and don’t feel a need to sell their homes. On the flip side, there are not enough homes on the market to satisfy all the buyers, who are bidding up the prices of homes.
But many of the home sale transactions don’t make it to closing, or at least not without some disappointments and fighting. The dreaded appraisal is the culprit!
The appraisal is a third party evaluation of the home which the bank requires for a mortgage approval. An appraiser comes to the home and compares it to recent sales. In our market, the appraiser has a difficult job because there may not be enough recent sales of similar properties, and the price buyers are willing to pay is higher than it was just a few months ago.
Because of the formulas, regulations and rules the appraisers must follow; their evaluation is often coming short of the offer price, which the buyer and seller already agreed upon. What does this mean? Here’s an example:
Four offers are submitted on a house in Newton, and the best offer was accepted at $800,000. The buyer agrees to pay a 30% down payment, $240,000 and submits a mortgage application for a 70% loan, $560,000.
The appraiser uses the limited recent sales data for similar houses nearby, and comes up with an appraised value of $750,000. The mortgage company will still fund 70% of the appraised value, but now this number dropped to $525,000.
Once of several things may happen next:
- The buyer may demand the price reduced to the appraised value. Why should he pay more than that?
- The buyer can make up the difference in cash.
- The buyer and seller can negotiate a price between the $800,000 and $750,000. The buyer will pay cash for anything over $750,000.
- The buyer and seller may terminate the agreement, (if there is an appraisal contingency in the agreement, which I’ll discuss in another posting).
Whatever the decision, it is never a romantic time during a real estate transaction process. Both parties are usually upset – buyer fearing he is over paying and dreading the added cash expenditure and seller annoyed she is making less than expected. This is especially disappointing when there were several offers, four buyers is willing to pay more than the appraised value!
Five years ago appraisals were rarely a problem. But are and will continue to be an issue everywhere prices are going up, inventories are low, and buyers are ready, willing and able to buy.
Buyers and sellers must prepare themselves for the appraisal. I’ll discuss that in upcoming posts.