Appraisals: When Demand Outpaces the Market
Once contracts are executed and the ink dries on the earnest deposit check, buyers typically set their sights on financing. And why not? With interest rates in the high 4’s and low 5’s you can still access historically low interest rates.
With a recovered real estate market and tons of pent up buyer demand, the market is in full swing and purchase transaction activity has increased. Many Buyers are still wringing their hands if faced with a big decision when the appraisal comes in lower than the contract price they agreed to. Typically, an appraisal evaluation is conducted after the purchase price has been agreed to. It is not uncommon in this active market to see the appraisal come in five, ten, even fifteen thousand dollars lower than expected. This presents a real conundrum and one that Buyers are still getting used to in this market.
Three tips to avoid pitfalls with a low appraisal:
1. Order the Appraisal Early
Often this can be difficult to do too early in the loan underwriting process as the Borrower’s credit, assets, income, and liquidity position are being analyzed. Appraisals can cost up to $600.00 and one wants outstanding invoices as the result of an incomplete transaction.
2. Ask your Real Estate Agent to Attend the Inspection
This can be helpful should the Appraiser need extra data points or the added value of a Professional that is especially knowledgeable about the neighborhood. His/her expertise can provide insights into an area that may be distinct in location. Real estate agents can also offer unique insight about upcoming closings to be used as sales comparisons.
As part of the newest mortgage lending regulations, Section 1472 of the Dodd Frank Act, known as Appraiser Independence, was established to restrict mortgage representatives in their communication with the appraiser. This new process was an attempt to eliminate implied pressure on the appraiser to inflate values that may be unjustified based on sales comparisons. For this reason, your real estate agent should be proactive and take the lead once they’re contacted by an appraiser.
3. Be prepared & Have an Expert on Your Team
Have a plan B for how you and your family might respond should this issue arise. You’ve found your family’s dream home, you are content and have agreed to the price and terms of the contract and mortgage loan. You’ve likely created your Pinterest board or are daydreaming of where you will put the pool table in your new man cave.
Now, the appraisal comes in low – Will you pay the difference over and above the loan amount? Is your Lender creative enough to help you restructure your terms with a payment you can afford? Will you attempt to renegotiate the price or perhaps (and likely in this market) there is another family waiting in line with a backup offer to scoop up the new home.
If you’re considering purchasing a home, then getting pre-approved is one of the fist steps on the journey to homeownership. Contact us today to learn more about the home buying process or begin the pre-approval process right now. Whether you’re looking to buy, sell, or invest in real estate, we look forward to the opportunity to serve you.