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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. Buyers fall in love with a house so much that
they are willing to risk that it might not appraise at the purchase
price.
Believe it or not, appraisals
do not always keep up with market value.
Why not?
Appraisals:
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 the United States has
increased by $20,000. In some areas, it 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 recent 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:
You see, lenders base the loan
amount on either the appraised value or the purchase price,
whichever is lower. If a buyer is applying for a
five-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 five 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. All the advantages of
the multiple-offer situation have been wasted.
Conclusions:
So...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 temptation to renegotiate.
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 problems. | 
