Appraisals: What to Do in a Hot Market

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One of the byproducts of a hot market is that appraisal prices tend to come in low. When an appraiser finalizes the numbers for a home, they find it challenging to justify the higher prices.

Home Prices in a Strong Market

It’s common for this to happen when the market is rising. Think about it: appraisers have to show that the property is worth the purchase price. They look at the current condition of the home compared to recent comparable sales in the area.

When the market is hot, it’s possible for a home closing now to be anywhere from $10,000 to $20,000 higher compared to a home that closed a few months ago. The appraiser needs to take those comps to show that the home is worth more, even though it’s only been a few months.

Tips for Buyers

As a buyer, here are two effective strategies to use if you can afford do to it:

  • Waive the appraisal in its entirety. Not all buyers have this option, but it can be a powerful strategy to get the home that you want.
  • If you can’t swing the “blank check” between the appraisal and the purchase price, then you should identify what your maximum out of pocket amount would be to cover the shortage. This information can be listed in the offer. For example, we might say “Buyer agrees to cover an appraisal shortage, up to a maximum of $15,000, should the home not appraise.” Of course, you are not obligated to pay higher than the purchase price.

From the seller’s standpoint, they know that there is a protection policy against an appraisal shortage. In comparison, if the home doesn’t appraise, then the buyer isn’t obligated to buy it for any higher than the appraised price or the purchase price (whichever is lower). This makes the offer much less appealing, which decreases the likelihood a seller will accept the offer in a competitive market.

In this scenario, if the appraisal comes in shy, then we are up for negotiation. Either the buyer needs to come up, or the seller needs to come down. Handling these things up front in a hot market helps to relieve anxiety on both sides, and increases the likelihood that you can beat the competition.

If you have any questions, I’m always here to help Call, text, or email me at (951) 473-0390 or [email protected].