Appraisals
Appraisals
If you’re buying or selling real estate, expect the property will be appraised.
Even if a deal is not subject to financing, there is a good chance a purchaser will want to take advantage of the low interest rates that are currently available. Lending institutions require an appraisal of a property that will be used to secure a mortgage. This official opinion of value plays a key role in the mortgage application approval and helps determine the down payment required.
It sounds straightforward, but in recent months the coronavirus pandemic has upended appraisals just like it has everything else.
A fast-moving market makes accurate data hard to get
The thing to remember about appraisals is that they’re based on historical data. An appraiser will look for properties similar to the one being appraised, usually and ideally those sold less than six months earlier. Note that the deals struck on those identified comparable properties (known as comps) usually occurred two to three months before the closing and may have been priced and listed even months prior to the deal. Generally, this works fine; over time, history moves slowly, and things don’t change too dramatically except for brief periods of upheaval.
We’re in one of those turbulent times right now. A sale closed just six months ago was struck before the pandemic, and the world was very different then. Real estate-wise, here in the Hamptons we were just coming out of a long-lived buyers’ market. And just like that, everything went sideways. By April the volume of sales started to increase and then, so did prices. Available homes, especially those in new or like-new condition, sold as quickly as they could be seen — some at prices over asking and many with multiple bids.
What this means for buyers right now
It might sound like a small step in the home-buying or selling process, but appraisals have an impact on deals. Brokers are seeing deals fall through because the prices people may be willing to pay now just don’t square with the prices of even the recent past. As much as sellers welcome the higher-than-anticipated prices, purchasers don’t like to overpay, and lenders won’t loan if the appraised value is out of line with the purchase price.
For example, a house might be worth $2.1 million compared to similar homes sold in April, 2020, but because of the increased demand a similar house may have sold for $2.5 million in July. Valuations will catch up, but until that happens, purchasers expecting to borrow 80% of the agreed-upon $2.5 million sale price find themselves needing more cash to close. In this example, if a lender is willing to loan 80% of the appraised value but not 80% of the actual sale price, the purchaser will need to come up with an additional $400,000 to close.
And if that is not too hard to swallow, imagine thinking you overpaid by so much? In reality, that premium is not overpaying, it simply means the market rose. By definition, market value is what someone is willing to pay. But if comps don’t support the higher price, the lender may not accept the loan application at all or will only accept at a lower loan-to-value rate.
What this means for sellers right now
It’s a good idea for a seller to get an appraisal before listing for sale, or even before making a decision about selling. Most sellers rely on real estate sales agents to suggest a listing price, but such estimates can’t help but factor in the agent’s wish to get the listing. Usually but not always, the agent with the highest estimate of value will get the listing and, as a result, the price they suggest may be too high. More importantly, the agent’s recommendation is not what a lender will rely upon.
An appraisal can cost a few thousand dollars but can save much more than its cost in time and money. A pre-listing appraisal is as important as a pre-listing home inspection; both serve to get ahead of what a purchaser will discover. Doing so can help to avoid the most common and most costly mistake a seller can make --- listing too high.
I am often amazed by how homeowners both over and undervalue such an important asset. Such knowledge can help you appeal too-high real estate taxes, purchase the correct insurance policies, negotiate a divorce settlement fairly, plan retirement, set up trusts, settle estates, plan for tax payments, borrow money and invest and allocate assets wisely. It’s smart to know the true value of your assets, and an appraisal can help with that.