When Market Value Outpaces Appraised Value

							When Market Value Outpaces Appraised Value
A home's market value is the perception of the
buyer.
Sometimes, most often in a situation with multiple buyers, offers will be made
that exceed the listing price. Buyers fall in love with a house so much that they
are willing to risk that it might not appraise at the purchase price.

Believe it or not, appraisals do not always keep up with market value.

Why not?

Appraisals:

Appraisals are performed for lenders, not buyers. The purpose is to justify the
sales price so that the lender feels they are making a solid investment since the
property is collateral for the loan. On appraisals, most weight is given to historical
data - sales that have closed in the last four months.

In the last four months the average sales price of a resale home in the United
States has increased by $20,000. In some areas, it is more - in other areas, less.
And that is just the "average" house.

Appraisers try to make allowances, but because they have rules and guidelines
to follow, there are times when they cannot - especially in dealing with multiple
bidding situations and in areas where there are fewer recent sales.

Preparing in Advance:

Given the recent sudden increase in home prices, what happens when a buyer
knowingly bids so high that he risks the appraisal coming in low?

Sellers in this situation need to prepare by counter-offering that appraised value
is not a contingency of the transaction. That almost automatically disqualifies
buyers making minimal down payments, because a low appraisal will affect their
ability to qualify for the loan - unless they have additional funds available to make
up the difference.

Buyers need to be prepared in advance for the possibility that the appraisal might
not match the market value in certain situations.

Coping With the Challenge:
You see, lenders base the loan amount on either the appraised value or the
purchase price, whichever is lower. If a buyer is applying for a five-percent-down
loan and the appraisal comes in low, the loan amount will be calculated based on
the appraised value. The required down payment will be five percent of the
appraised value, plus the difference between the appraised value and the
purchase price. That requires additional cash. If the buyer does not have the
additional cash available - or is "surprised" by a low appraisal - that puts the
transaction in jeopardy.

Which means the seller needs to start over and find another buyer. All the
advantages of the multiple-offer situation have been wasted.

Conclusions:

So...when accepting high offers, sellers should ensure the buyer has enough
additional cash available to make a larger down payment - should it be
necessary - and the knowledge that a low appraisal is a possibility, so that there
is no sudden temptation to renegotiate.

Buyers should be prepared for the possibility that they may have to make a larger
down payment than anticipated.

That's why qualified real estate agents are so important - they anticipate
challenges and solve them before they become problems.