With Florida’s business friendly economic plan, the absence of a state income tax, and reasonable weather year round, many people are choosing to relocate to our state permanently with new freedom in a work from home environment. These factors, coupled with a nationwide shortfall in new home inventory and supply chains problems related to Covid-19, have helped contribute to an 18% rise in home values during the last year according to CoreLogic. As homes are appreciating and prices are rising, the gap between values 6 to 12 months ago, and values today, can be sizeable. All these factors highlight some of the shortfalls in the traditional bank required appraisal process. In the event that your next purchase or sale can’t be supported by looking back at historical comparable sales, we’ll give you some strategies and tips in this article to help keep your deal on track.
In an appreciating market with few homes available, buyers are willing to pay above a homes historical appraised value to create more certainty and security in their living situation. In fact in many cases, buyers are paying tens of thousands of dollars more for a home than the list price. A list price is, after all, just a marketing tool to attract buyers to the home for a viewing. An appraiser’s job is to establish a home value for the lender based on past market data, not necessarily on up to date and current values. When this market value comes in at less than the contract price, you have what’s called an appraisal gap.
So how does the appraisal gap affect you when you’re purchasing a home? It varies based on your loan type, your credit, and your lender, but generally, your lender is willing to loan you a fixed amount of the lesser of the Purchase Price OR Appraised Value. Let’s take the example that you’re approved for a 10% down (90 LTV loan), and you’re under contract for $500,000 home. If the home appraises for $450,000, the total amount the lender will pay is 90% of $450,000. This means that instead of coming up with a $50,000 down payment you’ll need to bring a $95,000 down payment Some buyers are fully prepared to absorb that difference in this market, but for others, a low appraisal can mean losing the home they’ve fallen in love with.
The absolute best way to combat or prevent a low appraisal is to have BOTH an experienced buyer’s agent AND local lender on your side
This is the time to lean on the professionals. Lenders hire an appraisal management company to assign appraisers to their loans. Those appraisers can be responsible for hundreds of appraisals at any given time and cover 2-7 different counties in Central Florida. When an appraiser has that much reach, their neighborhood market knowledge can be lacking. For example, an appraiser accustomed to working in Winter Springs or Lake Mary may not understand how valuable it is to have a mother-in-law suite attached to a property in Delaney Park or Lake Eola Heights. This lack of specific neighborhood knowledge could lower the appraisal value by $10,000 or more. A local lender who works with a smaller pool of appraisers in a smaller geographic area will give you an advantage as their appraisers tend to have more detailed market knowledge.
Your buyer’s agent’s local market experience is also an invaluable tool in helping keep that appraisal value up. As I mentioned previously in my post about VA Loans, a good buyer’s agent will come to the appraisal prepared with their own Comparative Market Analysis (or CMA), which is an estimate of a home’s value based on recently sold, similar properties in the immediate area. While it’s an appraiser’s job to look at the data from recent sales in the area, they don’t always have intimate knowledge of the neighborhood, and might compare your home to properties in the area that aren’t really that comparable. The buyer’s agent can also emphasize to the appraiser the value of certain improvements to the home that might not be readily visible (such as new plumbing, wiring, smart home, or other systems). Your buyer’s agent can also challenge an appraisal that is way off market value. There’s no guarantee that the challenge will result in a new appraisal, but it’s a tool that your agent has at their disposal that you wouldn’t have if you were going it alone.
When all else fails, a dedicated, experienced buyer’s agent will negotiate with the listing agent to get the sellers to chip in to close the gap. An exceptional buyer’s agent will anticipate any appraisal gap and not only ensure you’re prepared for it, but also have the conversation with the listing agent before the contract is signed to gauge how a seller will respond to a low appraisal so that all parties are satisfied and the sale closes.
When you’re ready to buy, reach out to me and I can make sure you’re fully prepared for all parts of the buying process, including possible appraisal issues.
After years of working with both local and national lenders, we’ve partnered with America’s Money Source, and we they have a great pool of local appraisers who have excellent local market knowledge. Click here to get pre-approved and start the process.