How to Bridge the Appraisal Gap in Today’s Real Estate Market
How to Bridge the Appraisal Gap in Today’s
Real Estate Market
APPRAISALS IN A RAPIDLY SHIFTING MARKET
An appraisal contingency is a standard inclusion in a home offer. It enables the buyer to make the closing of the
transaction dependent on a satisfactory appraisal wherein the value of the property is at or near the purchase price. This helps to reassure the buyer (and their lender) that they are paying fair market value for the home and allows them to cancel the contract if the appraisal is lower than expected. Low appraisals are not common, but they are more likely to happen in a rapidly appreciating market, like the one we’re experiencing now.3 That’s because appraisers must use comparable sales (commonly referred to as comps) to determine a property’s value. This could include homes that went under contract weeks or even months ago. With home prices rising so quickly,4 today’s comps may be lagging behind the market’s current reality. Thus, the appraiser could be basing their assessment on stale data, resulting in a low valuation.
An appraisal is an objective assessment of a property’s market value performed by an independent authorized appraiser. Mortgage lenders require an appraisal to lower their risk of loss in the event a buyer defaults on their loan. It provides assurance that the home’s value meets or exceeds the amount being lent for its purchase.
In most cases, a licensed appraiser will analyze the property’s condition and review the value of comparable properties that have recently sold. Appraisal requirements can vary by lender and loan type, and in today’s market in-person appraisal waivers have become much more common. Analysis of the property, the local market, and the buyer’s qualifications will determine whether the appraisal will be waived. Not all properties or buyers will qualify, and not all mortgage lenders will utilize this system. If you’re applying for a mortgage, be sure to ask your lender about their specific terms.
WAIVING THE APPRAISAL CONTINGENCY
Some buyers with a higher risk tolerance—and the financial means—may be willing to waive the appraisal contingency altogether. However, this strategy isn’t for everyone and must be considered on a case-by-case basis. It’s important to remember that waiving an appraisal contingency can leave a buyer vulnerable if the appraisal comes back much lower than the contract price. Without an appraisal contingency, a buyer will be obligated to cover the difference or be forced to walk away from the transaction and relinquish their earnest money deposit to the sellers.
It’s vital that both buyers and sellers understand the benefits and risks involved with these and other competitive tactics that are becoming more commonplace in today’s market. We can help you chart the best course of action given your individual circumstances.