If you’re looking for a new home, you’re likely already aware of the hot housing market. Maybe you’ve already lost a bidding war? Maybe you’re tired of staring at rising price tags. There’s no doubt it is a seller’s market and the competition is steep! Due to the increased demand of buyers and the low inventory of homes for sale, the average selling price of homes in most markets is rising, rising, rising….
However, the current seller’s market is affecting more than just home prices – It’s also influencing home appraisals. Low appraisals are a typical byproduct of a seller’s market and can create difficult situations for buyers. Even the strongest of offers can fall flat if an appraisal comes back significantly lower than what a buyer is offering. You don’t want to purchase a home that gets appraised for far less than what it’s being sold for, nor does your lender want that.
What is a home appraisal?
A home appraisal is a neutral opinion from a professional who is trained to give an estimate of a residential home’s market value. Once a home is under contract, an appraisal will be required. Appraisal values are meant to give assurance to the buyer and the lender that the home under contract is worth the agreed-upon price for which it’s being sold.
Other than letting the buyer know if they’re overpaying for the property, the appraisal value is also used during the underwriting process the bank takes in determining the final loan amount. Appraisal values are commonly used to determine property taxes, as well.
Be careful not to confuse a home appraisal with a home inspection – though both are very important! A home inspection is meant to identify any problems or alert the buyer of any red flags that need to be addressed before the home is officially sold. Is there a leaky roof? Does the furnace work? Do all the electrical outlets function? It’s much more detailed and in-depth. It differs from an appraisal in that it doesn’t necessarily determine the sale price of the property, but rather is just one aspect of determining the price.
Who pays for home appraisals?
Most commonly, the buyer should expect to cover the appraisal fees. Depending on the company, the average cost for an appraisal can range between $300 – $500. Buyers should seek an unbiased professional for this task and shop around for a third party they’re comfortable with. Oftentimes, the knowledge of a real estate agent comes in handy at this point!
What can I do if my home appraisal comes back lower than expected?
It’s very common for homes to appraise lower than the selling price in such a competitive market. In situations like this, bidding wars ensue which drive the price of a home up. If a home valuation comes back lower than the price for which it’s being sold, a lender may choose to forgo finalizing a loan at the risk of lending more than the home is worth. If this happens, there are a few options a buyer can pursue in order to still get the keys to their dream home!
Renegotiate the purchase price of the property.
One of the first steps you can take if you receive a low appraisal is to try to renegotiate the purchase price of the home. This could be considered a risky move depending on if the house you’re vying for has multiple offers.
However, it’s possible others will receive a similarly low appraisal value and your offer could once again be enticing to the sellers. It’s very wise to have a knowledgeable agent on your side during times like this. However, the buyer should be prepared for the seller to not budge on the listed price and consider some other options, such as walking away, offering a higher down payment or looking into appraisal gap coverage.
Appraisal Gap Coverage
What is “appraisal gap coverage?” In today’s market, a buyer may have to pay more than the listing price to rise above other offers made on the property. If this happens and the appraised value comes back lower than the negotiated price, the bank may not be willing to offer a loan to cover the gap between the appraised value and the listed price. If this happens, the buyer will have to cover the difference, which could be a large sum of money!
As an example, if an offer is made on a home, but the appraised value comes back as $10,000 less than what was offered, the buyer can either risk renegotiating the price, come up with an additional 10k to cover the difference of what the bank will loan, or simply move on.
A seller will likely want to accept the offer that guarantees they will sell for more than the listing price. This is where appraisal gap coverage plays a crucial role. Appraisal gap coverage is essentially insurance for the seller that the buyer pays an agreed-upon amount over the appraised value if it comes back lower than the negotiated purchase price. In some cases, this route provides a winning situation for both the buyer and seller. It provides assurance to the seller they will receive more than the listed price, but also limits how much more than the appraised value a buyer has to pay.
Of the many reasons it’s smart to have a reputable and smart real estate professional assisting you in this process, this is one! To partner with a sharp negotiator with a strong knowledge of the market and one who is experienced getting offers accepted, contact one of Brevard’s best, Misty Morrison at 321-574-8119.
