The current housing inventory is at a historic low, which has created a very competitive bidding market for buyers and has driven up prices significantly. While this may make for a sellers’ market rapidly escalating prices can create problems, especially with appraisals.
One of the biggest challenges these days is getting homes to appraise at or above the contract price. Appraisers typically rely on “comps,” the most recent price of similar houses in the general area around the house being appraised.
The issue that can crop up is that despite a prospective buyer’s willingness to pay a higher price, the home doesn’t appraise for that amount.
When a property appraises below the contract price, either the buyer and or the seller must cover the shortfall to ensure the buyer can obtain a loan that meets lending guidelines. Given the bidding “wars” that frequently occur:
- Prospective buyers may have stretched their budget to the point where they can’t afford to cover the difference
- Sellers may also not be able or willing to adjust the price.
- Often times, the end result is the deal falling apart at the last minute and lots of stress for all parties
Here are some tips to avoid trouble and minimize risk
- Agents should discuss current market conditions with their clients (buyers AND sellers) and review the possibility of the property not appraising at the contract price and how they can AVOID any appraisal issues (as much as possible)
- Sellers, in particular, need to work with their agent to map out a strategy to deal with the possibility of a shortfall before listing the home
- Maximize Value – If the home needs to be refreshed or upgraded focus on the kitchen or the bathroom – which are the high-value areas and consider wood floors, landscaping and most importantly of all freshen up with paint and extreme cleaning
- Document Any Home Improvements – that means that you should create a folder with all the receipts for any and all things done to improve the home so you can document and prove all the upgrades, and repairs made to home
That documentation should be provided for home appraiser documentation so he or she can factor the improvements into their work to determine a value
- Provide Comps & Transaction Details for the Appraiser – Since this is what appraisers primarily use to determine a home’s value, it makes sense to be prepared with a number of recent sales that really are comparable – avoid leaving the choice of what a proper comp might be strictly to the appraiser – they might not use the most recent or most truly comparable values – Be sure to let the appraiser know if you received multiple offers.
- Be Prepared – Negotiate with the Buyer and Seller in the purchase contract what is going to happen in the event the home doesn’t appraise and who is going to cover the shortfall with specifics, especially dollar amounts
Be sure to properly evaluate offers and make sure Buyers and Sellers can deliver on their obligations and have proper expectations as starting over can be a painful process for everyone.