Appraisals Don’t Matter In A Seller’s Market
I had someone ask me the other day, “Pricing is crazy! How are all these homes appraising? It makes no sense.” Good question. A lot of them are not appraising at all. It also does not matter. Why? I’ll explain.
Appraisals are a tool used by lenders to make sure that what they are loaning you is what the home is worth. No one wants to loan someone $500,000 for a home that is really only worth around $300,000. That’s an extreme example, but that is the idea. There is a good idea here.
The thing is that appraisals are an opinion of value of the appraiser. That means that two different appraisers can (and typically do) value the same home differently. I have had the same floorplan of a home appraised for $425,000 with one appraiser and $333,000 with another. That was in the same week. It is their opinion of value and isn’t always necessarily a reflection on the home, which is supposed to be the whole point. And that’s before we even get into the biases that appraisers can have (like in this situation where they undervalued a home because the owners were black).
This isn’t to bash appraisers. Most are good at their jobs and are doing their best to value homes as fairly as possible. So, how do they handle a market where homes are $40,000 more than the last closing due to having 12+ offers and a “highest and best” situation? They really can’t. They will value the home based on where the last homes have closed. Some may be generous and allow for $5000- $10,000 additional on the price, but that’s fewer and further between. Remember: Their asses are on the line for the appraisals they do. So they are trying to do this right.
How does this affect the buyers? If the bank will only lend for what the home appraises for then you offering $450,000 for a home that appraises at $400,000 means the bank is only going to loan up to $400,000.
“That sounds like a huge deal FOGA” I hear you saying. Yeah, it is. It also does not matter in this market. Why? Because people are just paying the difference out of pocket. The home you went under contract for $500,000 appraised for $460,000? That’s $40,000 more out of pocket that you need to bring to closing. And the buyer goes, “Okay.” Most contracts are being done where they waive the appraisal contingency (if there was one). New construction is upfront on the fact that they aren’t paying any appraisal shortages. So appraisals still have a place and a job. People are just bypassing it by paying out of pocket. Why? Simple. At the end of the day, a home is worth what people are willing to pay for it. Really, that applies to all things. Right now, people are willing to pay a lot whether or not it makes any sense at all.
So, appraisals are happening. A lot of times, they are lower than the price people are actually buying the homes for. However, as long as they have the cash, they can still close. Plus, when they do close, they create a new comp that will make the next appraisal in that area easier since now there is a precedent for this new price. That will provide justification of value for the next home that goes on the market in that area. Then that home may have multiple offers which may push the price the home sells for higher. And the cycle continues. Because a home is worth what people are willing to pay for it.
In my area, the market is still very much like this:
How’s the market in your area? Slowing down? Crazy?
Feature Photo by Nikhil kumar on Unsplash
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