How Home Sales And Real Estate Values This Spring May Be Outpacing Appraisals In The Near Term
Current Market Conditions
The fast pace of home sales so far this Spring in Northern Virginia has led to some familiar challenges:
Low inventory means fewer choices for Home Buyers, and even less choice of the best properties available. Multiple contracts are common across much of our market and the resulting competition for the most sought-after properties often leads to 'bidding wars' with many homes selling for over their original Asking Prices.
While this phenomenon is certainly welcomed by Home Sellers - -and their Agents - - there is a potential 'storm cloud' on the horizon that threatens to slow the pace and potentially may be a sobering reminder that there are some controls in place that will prevent our market from overheating too quickly.
Enter the professional Property Appraiser.
The Rear-view Mirror Effect
To understand why such a 'storm' may be looming in the near-term, one only needs to understand and appreciate the role of the property appraisal and how they are calculated and determined.
A property appraisal looks first and foremost as what has actually happened (closed real estate transactions) and less upon the current market conditions (homes that are Under Contract, actively For Sale, and the multiple -contract experience of many Sellers). This creates a challenge when short-term home values are rising.
You could say that because of this, a property appraisal is most like driving a car by looking in the rear-view mirror - - it focuses primarily on the recent past sold, settled sales as a basis of comparison in determining the current market value for a subject home.
The industry standard is to consider the most comparable properties (most like the subject home in location, size, features, etc.) that closed within the past 3 months - - up to 6 months if necessary. The problem with driving while looking backwards is that you might miss a turn in the road (increase in what homes are now selling for) until it becomes very obvious.
So what happens when real prices are soaring in a very short period of time?
Adjusting For Market Conditions
Eventually, property appraisers must take into consideration the increased pace of sales and upward trending in Sales Prices. This will certainly occur as more and more homes are settled at these higher contracted prices and the sharp increase in values becomes evident (in effect, homes sold and settled early this Spring will become the newest and best 'comps' for sales occurring in the later Spring and Summer months).
The 'Waived' Appraisal
In some cases, especially when a 'bidding war' erupts, some Home Buyers are 'waiving' their appraisals - - or, more accurately, they are waiving the Appraisal Contingency within their Sales Contracts.
So, what does this mean?
Well, in short, the Buyer is saying that they will proceed to closing on the home whether or not the Appraised Valuation meets the full contracted Sales Price. In doing so, what they are representing to the Seller is that they will proceed with completing the sale, even if the appraisal comes back short of the Sales Price.
Sounds simple enough, but there's a catch...
A 'waived' appraisal is meaningless if the Buyer does not have the funds to actually pay the difference between the Sales Price and a 'low' appraisal. Only where the Buyer can demonstrate their financial resources as being capable of paying any 'appraisal shortfall' should a Seller take comfort in this approach.
Typically, the larger a Down Payment a Buyer is making, the greater their ability to proceed with a purchase if a gap exists between the Sales Price and the value determined by an appraisal (the idea here being that they will still qualify for their new loan, based upon the appraised value, and have the cash to bridge the difference).
But not all loan programs may allow for this. Loans made through the Veterans Administration (VA) or backed by the Federal Housing Authority (FHA) might prove harder for a Buyer to obtain in the case of a low appraisal. And borrowers using these 'low or no' Down Payment programs may simply not have the extra resources to pay the difference in the case of an 'appraisal gap'. If so, then a 'waived' appraisal means nothing.
Remember, ultimately the appraisal protects the bank or mortgage company who is making the loan.
They have the money, so they make the rules. And part of those rules is to justify that the price being paid for the home (and, therefore, the 'collateral' that the lending institution counts on in case of default) is truly a current market value that is supported by an objective, third-party professional appraisal.
What To Do If The Appraisal Comes Back Low
Watch for our future Blog post that will cover what the options are when an appraisal comes back low, how to contest a low appraisal if you are a Buyer, and (most importantly) what your Listing Agent can do to help to prevent or minimize the chances for your Home getting a low appraisal when you are the Seller!
Curious what all of this means and how it may effect you as a future home buyer or seller?
We are here to help, as we have guided and assisted hundreds of Northern Virginia buyers and sellers!
We help our SELLERS to get "The Most Money For Their Home", and our BUYERS to get "The Most Home For Their Money" - - and we can do the same for YOU!
"We Sell Homes From A Fresh Perspective...YOURS!"
Like us on Facebook @theartofrealestateteam