The real estate industry has been experiencing one of the hottest markets in history. This is due to low interest rates, historically low inventory and more than usual buyers flocking to the market, thus, homes have been selling in record time. As a result, home values have been increasing. In fact, according to the National Association of Realtors, "94% of metro areas saw double-digit price growth in the second quarter of 2021." Buyers are offering sellers prices considerably above list price in many cases.
Real estate appraisers however are acting more level-headed. It's their job to protect the mortgage companies' investments. There are many instances nowadays where a house doesn't appraise for the price on the contract. This impacts the lenders, the sellers and the buyers in the transactions.
How It Affects Lenders
If you are not paying cash for a home in today's market, you are most likely obtaining a mortgage loan. Many buyers are placing a down payment of 5%, 10%, 20% or more on the homes they are purchasing. The more money you put down, the less risk the mortgage lender has in the transaction. The less money you put down, the more risk the lender has. It's an appraiser's job to protect the mortgage lender's investment in a home. An appraiser looks at previous sales data when appraising a home. If the property value isn't supported by other comparable sales in the area, the appraiser may not appraise the home for the contract price. The lender will only lend the loan-to-value amount of money to you, the buyer.
How It Affects Buyers
If the home you are purchasing doesn't appraise, you are in a bit of a bind. It may be good news or it may be not-so-good news. You have a legal right to ask the sellers to sell you the home for the appraised price. However, in today's sizzling hot seller's market, many sellers won't agree. You may be asked to come up with the difference between the appraised price and the sales price on the contract. If you don't have the money to do this, the contract may have to be canceled under the financing contingency. Should this happen, you should be protected under this contingency and you should receive your earnest money back. Some buyers who have extra money in their savings actually waive the appraisal when they write the offer. In this instance, you will have to pay the amount higher than the appraisal price.
How It Affects Sellers
In today's market, sellers are in the driver's seat. If the house doesn't appraise for the home value you sold it for, you should ask the buyers to come up with the difference. This is a common practice in a super seller's market as we are experiencing now.
The Three Usual Outcomes
One of three scenarios can happen when a house doesn't appraise for the price on the contract. The first is that the home will sell for the appraised property value. This means the sellers will come down to the appraised price. This is more typical in a buyer's market. The second scenario is that the buyers are asked to pay the difference. This is happening more times than not in today's market. The third scenario is that the buyers and sellers meet somewhere in the middle. This is common in a more balanced real estate market.
Appraisers are more in control of home values than many people think. They don't have any emotion in the transactions. They work for the mortgage lenders. Sometimes they don't appraise homes for contract prices.