During hot housing markets with multiple bidding scenarios, home appraisals are often coming in short because comparable properties aren’t as easy to find when sales prices are rising so quickly.
If you’re looking to buy a home, it’s important to understand that lender approval is based on certain conditions including an appraisal of the property. The appraisal is conducted by a licensed professional real estate appraiser who provides an evaluation of the home’s fair market value using factors such as size, location, condition and recent sales of similar homes in the area. Lenders use this valuation to measure the mortgage amount for which buyers qualify relative to the market value of the property they’re financing. This is known as a loan-to-value ratio (LTV).
Ideally, the appraised or fair market value of the property should be in sync with the agreed-to purchase price. Recently, however, there has been a noticeable disconnect. Appraisals are coming in lower than the selling price due in large part to bidding wars, which are becoming commonplace and disproportionately reflecting a home’s true value. In order to win the bid, buyers are paying hundreds of thousands of dollars over asking, meaning the probability of the appraised value aligning with the sale price is unlikely.
If the appraisal falls short, buyers will need to increase their down payment, which they may not have, or require a larger loan to make up the difference, which can prove problematic if they don’t qualify and are forced to find another approach to bridge the gap.
Added risk for buyers
Since the onset of COVID-19, an inventory shortage has led to fierce competition among homebuyers forcing many, in addition to paying far more than asking, to waive all conditions in order to increase their chances of securing the winning bid. Conditions on an offer to purchase are designed to protect buyers’ interests, and financing conditions in particular are critical as they afford buyers the option to walk away should they be unable to secure the required loan and complete the purchase.
With significant gaps between appraisals and what buyers are willing to pay, the repercussions of unconditional offers could be devastating. If the deal falls through, buyers will not only lose their deposit, but they could also be sued for damages and breach of contract by the seller.
If you’re in the market to buy a home, let’s get you prequalified for a mortgage so you know what you can comfortably afford to spend before you start your property search and you’re not putting yourself at risk by over-bidding. The prospect of losing out may be disheartening, but it’s important to know your limit and ensure you have enough latitude if the appraisal and sale price are out of whack.
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