The Utah housing market started the year at a strong pace, but exceptionally low inventory levels are holding back many prospective buyers who would have purchased homes had more choices been available.
Few homes for sale combined with high demand for housing has created a hot housing market. With home prices rapidly increasing — in January Utah prices were up 17% — that’s creating several challenges for both buyers and sellers.
One of those challenges is when the appraisal comes in less than the purchase price, threatening the buyer’s ability to purchase the home. While this can happen at any time, it often occurs in markets where home prices are rapidly rising.
It’s a situation that can be disappointing for all parties, so here are some tips for both buyers and sellers on navigating a successful transaction.
All about Appraisals
For buyers who need a mortgage, getting an appraisal is part of the home-buying process. To protect their investment, the lender will require an appraisal to affirm the home’s value and justify the amount they are lending.
In many cases, the appraisal is close to the amount the buyer has offered to pay for the home; however, sometimes it comes in lower than the purchase price.
When this happens, the buyer has several options: 1) use cash to pay the difference between the appraised value and the purchase price, 2) negotiate with the seller on the price or other concessions, 3) back out based on the contract terms or 4) challenge the appraisal or request a new one.
Tips for Sellers
Sellers can take several steps to help the appraiser determine an accurate home value.
One of the most important things is to let the appraiser know about the unique features of your home. For example, you’ll want to make sure the appraiser has information about improvements, repairs and updates you’ve made to the home, including information about the quality of the changes you made.
This is particularly important for features that are not readily apparent. For example, you’ll want to provide information about updates to the home’s heating and cooling systems, roof, insulation and windows.
You’ll also want to highlight energy-efficient features such as windows and solar systems, and detail how much these improvements save you in energy costs each month.
Keep in mind that while your improvements may add value to your home, the value is likely less than what you spent on the project.
In addition to providing accurate information to the appraiser, you’ll also want to carefully consider offers. In this hot market, you may receive multiple offers if you price your home right.
As you evaluate buyers’ offers, here are a couple features to consider: 1) If buyers waive the appraisal contingency, you won’t have to worry about an appraisal coming in low. 2) If buyers indicate they will use cash to pay the difference between the appraised value and the purchase price (provided the appraised value does not fall below a certain point), that will provide some buffer for a lower appraisal.
Tips for Buyers
Buyers will want to work with their Realtor to determine how much a property is likely to appraise for based on comparable sales. If it’s likely to be sold for more than appraised value and you don’t have any flexibility to put down additional cash, you may decide to look for other homes.
If you do have some flexibility, you’ll want to talk to your Realtor about steps you can take to make your offer more competitive so there’s a greater chance the seller will accept it.
For example, you could waive the appraisal contingency or let the seller know that you are willing to make up the difference between a low appraisal and the purchase price.
If you find yourself in a situation where your appraisal comes in low, you’ll also want to talk to your Realtor about whether it makes sense to appeal the appraisal. To do this, however, you’ll have to let the lender know specifically why the appraisal isn’t accurate.
For more information about how to navigate a hot housing market, contact a local Realtor. Find one at MyRealtorStory.com.