The fact that residential home prices are increasing substantially in most regions of the country is thrilling to homeowners, and many of them are taking this opportunity to put their houses on the market. Active buyers are creating real demand in a variety of markets, and lots of homes are moving quickly. However, if you are in the process of buying or selling a home, make sure you realize one major challenge this hot real estate market can create.
Each house must be sold twice; first to a buyer, and then a second time to the appraiser who represents the lender who will supply the funds to buy the home (unless, of course, it is a cash purchase). In a fast-moving market with escalating prices, that "second sale" may be far more difficult. A recent survey by Quicken Loans revealed that the gap between what a homeowner believes is the value of their home compared to that of a professional appraiser is widening (see the chart below). And with more "0 down" and low down payment options, banks and mortgage guarantors are being asked to take on more risk by funding loans that may, or may not, be wise investments.
A market where homes are selling quickly for escalating prices to increasingly competitive buyers can and is leading to an increase in the percentage of real estate transactions being challenged by a ‘short’ appraisal (where the appraised value is less than the contracted sales price of the home). Licensed appraisers may be wary of going too far out on a limb when asked to support a high sales price, and often the search for good comparables is difficult. No one, however, wants a transaction that gets bogged down in the funding stage because the appraised value of the home is short.
Whether you are a buyer or a seller, you need to be prepared for this possibility as it may result in a renegotiation of the price of the home or the demand to bring more cash to the table. A good real estate professional will help guide you through this process as well as help support the appraiser in their research, and your Realtor can be invaluable in getting the deal done. Don't be caught unaware. And, as always, if I can answer your questions or help in some way, feel free to ask!