As if the homeowners haven’t gone through enough already with the crisis in 2008, Valley appraisers today are costing sellers thousands in home equity by ignoring the law of supply and demand in their property valuations. A low appraisal can spell doom for a deal!
You’ve picked the right real estate agent, listed your home for sale, negotiated and accepted an offer, and made it all the way through the inspection period. Phew, congratulations! The only hurdle standing between you and the finish line is the bank appraiser. Appraisers are most often hired by lenders to provide an independent third party home valuation. Since the home will serve as collateral for the loan, lenders want to ensure the value supports the loan they are about to issue. If the appraiser determines the home value is less than the contract price, the bank usually only lends a portion of the amount. The buyer then has the option to cancel the contract, renegotiate the price, or bring the difference to the table in the form of cash.
After the banking industry got caught with their pants down in 2008, it appears the “lender pendulum” has swung the other way. In 2005, anyone who fogged a mirror could obtain a half million-dollar loan, and they did. Although bank stocks tumbled during the crisis, the banking industry benefited handsomely from the Feds loose monetary policy. Now they are costing home sellers thousands in equity by “rounding down” in the name of fiscal responsibility.
We all remember econ class with the line graph showing one line for supply and the other for demand and where they intersect is the “equilibrium price”. That law of supply and demand isn’t as black and white when it comes to home values. The reason? Mortgages. Anytime you introduce someone else’s money, you’re risking moral hazard. Moral hazard is when buyers throw caution to the wind and overpay for an item because it's not their money. This muddies the water on how much an asset is truly worth.
Real life scenario. To protect the innocent, we changed our sellers name to Jeff. Jeff is excited to sell his Gilbert home and move up to Cave Creek for more privacy and wide open spaces. Jeff has an amazing home on Seville golf course, completely renovated with a pool! A search for 10 miles in all directions produces nothing similar to Jeff’s home. His neighbor sold their home a year ago for $400,000 so Jeff decides that’s a good starting price for his home, since it’s comparable, but a smidge smaller. In 10 days on market, Jeff had 12 showings and his pick of multiple offers. He chose a solid buyer from California who brought a full price offer. Jeff took the proactive step to get an independent appraisal for his own benefit. Now it’s time for the bank’s appraiser to evaluate the home. Jeff’s REALTOR did all the right things. He was responsive in answering the appraisers’ questions. He forwarded comparative homes in the area and even provided the showings report so the appraiser knew just how much people loved Jeff’s house.
The moment of truth... Remember, the home is under contract for $399,900. Jeff’s independent appraisal came in at $390,000. The lenders appraisal came in at $370,000! Now these are two full-time professional appraisers using the same guidelines and standards to arrive at two very different home values. How could the discrepancy be more than 5%? Jeff now has three options: Renegotiate the contact price, cancel the deal and go back on market.or convince the buyer to bring additional cash to the closing table. Appraisals can be rebutted, but this rarely results in a price change so we won’t get into that can of worms.
The purpose of this article is to shed light on an all too common flaw in the real estate sales process and to equip you with the knowledge to hopefully avoid this scenario when you sell your home. We live in a great nation that affords its citizen the opportunity to build the American dream with relatively little money to start. Because of this, responsible homeowners can amass large amounts of wealth over the course of just 20 to 30 years. If you’re interested in learning more about taking the first steps to homeownership, contact us. We are here to help.