Appraisals in a Rising Market
People are talking more and more about appraisals lately. That’s because in a market rising as quickly as ours (the median price is up 14% over last year) appraisals can't justify market value. When an appraiser is asked to assess a property to confirm the purchase price for the lender, the appraiser has to use past sales data, typically similar sales within the last 6 months. In a rising market, consumer demand sets value, not past sales, so we are starting to see appraisals coming back lower than contract price. So what happens if the home doesn’t appraise for contract price?
1. The buyer can ask the seller to renegotiate the contract price of the property. For example:
Contract price: $500,000
Appraised value: $490,000
Buyer can present the appraisal to the seller and ask the seller to reduce contract price to $490,000. If the seller feels the value is justified based on the comps used, the seller may agree. If the seller does not agree to reduce by the full $10,000, the buyer and seller may decide to split the different lowering the contract price to $495,000 with the buyer brining an addition $5,000 to closing.
2. If the seller is not willing to re-negotiate, the buyer could cover the difference in value by bringing extra money to the closing table. For example:
Contract price: $500,000
Appraised value: $490,000
The bank will not loan on a $500,000 purchase if the appraisal states the property is only worth $490,000. The buyer can make up the difference by adding $10,000 to the down payment they pay at closing.
3. The buyer can release the contract if no agreement is reached. If the seller won't re-negotiate and the buyer can't cover the necessary down payment difference, the buyer can release the contract as long as their contract includes an appraisal contingency.
But wait, what if it appraises for more than contract price? For example:
Contract price: $500,000
Appraised value $510,000
That’s great! That means you are buying a home with instant $10,000 in equity! But it's also rare. The appraiser's main job is to prevent the bank from making a bad loan, so often once they get to the sales price, they stop calculating.
Is it ever smart to make an offer that is not contingent on appraisal?
Maybe! We are seeing this more often in multiple offer situations when financed buyers are trying to compete with cash buyers. Removing the appraisal contingency makes an offer stronger. If you are confident the home will appraise for your contract price based on recent sales, or if you have enough cash to put down more, then removing the appraisal contingency may be worth the risk to make you offer stronger.
And finally, can you dispute an appraised value?
Yes you can, but you have to consider if it is worth it. Disputing an appraisal will take time, which a contract may not allow, and it could cost additional fees. And at the end of the day, there’s always the risk the home will still not appraise for the value needed.
Appraisals are still an integral and often confusing part of a real estate transaction. As always, we are here to answer any questions!
