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. Believe it or not, appraisals do not always keep up with market value. 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 Trinidad and Tobago has increased drastically. In some areas the increased value 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 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
Lenders will base the loan amount on either the appraised value or the purchase price whichever is lower. If a buyer is applying for a 10 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 10 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 or negotiate with the present buyer. All the advantages of the multiple-offer situation have been wasted.
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 need to re-negotiate.
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 an issue.