Navigating Appraisals & Multiple Offers In A Hot Seller's Market
In this extremely competitive market, many homes are receiving multiple offers substantially over the list price. Multiple offer situations in a seller’s market often drive purchase prices higher than any comparable sales in the area, and this can result in a low appraisal.
Lenders approve loans based on the loan-to-value ratio (LTV) which compares the value of the loan to the value of the property. The lender only cares about the appraisal to the extent that it affects the LTV. A low appraisal does not necessarily mean the lender will not lend. It just means that it will make a loan based on the ratio agreed to in the contract at the appraised value. If the LTV is 80% on a $500,000 purchase price, then the loan would be $400,000 (80% of purchase price) and $100,000 down payment (20% of purchase price).
Evaluating Multiple Offers
It is an exciting time for sellers to receive multiple offers above the asking price, but it can also be stressful deciding which offer is the best deal. A cash offer would eliminate a mortgage contingency and hence the need for an appraisal. What if other offers are considerably higher but have a mortgage contingency? How can you lower your risk of a low appraisal if you move ahead with a higher offer? One way is to renegotiate the terms of the contract.
First, consider how much the buyers are putting down. The larger the down payment, the more likely they have extra cash to bring to closing if the home does not appraise for the purchase price. If this is the case, a buyer may agree to negotiate a cap to the appraisal or wave the lender’s appraisal completely. Now is the time to negotiate the terms - buyers will be more receptive to accepting these conditions to beat out any other bids. It will be a different story 2 weeks before closing.
Cap or Waive Appraisal
Say the purchase price is $500,000 and the appraised value is $475,000. If the appraisal is waived, the buyers would need to bring an additional $25,000 to closing. If there is an appraisal clause in place that limits the buyer to only paying the difference up to $15,000, then sellers would reduce the sales price by $10,000 ($490,000) and buyers would bring an additional $15,000 to the closing table to account for the $25,000 difference.
Before renegotiating or choosing a contract amongst multiple offers, you will want to compare the risk to the potential reward especially if there is a cash offer in place. Additionally, verify proof of funds and confirm with buyers’ lender that a low appraisal will not hinder buyers’ ability to obtain a mortgage.
How to Help Ensure the Property Appraises High as Possible
There are a few things seller’s agents can do to ensure the appraiser has all the information necessary to factor in for a potentially higher appraisal value:
Meet the appraiser with comparable properties when possible
If the appraiser is doing a drive-by only due to social distancing restrictions, offer to walk them through the inside on Zoom
If they are doing a drive-by and will not let you Zoom, make sure they have updated pictures, especially of upgrades
If you have more pics than on MLS or high-ticket items not mentioned in the blurb or MLS pics make sure the appraiser knows
Disputing An Appraisal
An appraisal may come in low due to a number of factors. One of which could be the appraiser including comparable sales that do not best reflect the value. For instance, we recently had an appraisal of a waterfront comp where the appraiser used a non-waterfront sale as a comp resulting in a low appraised value. Also, an appraiser may have overlooked pending sale data, which could reflect higher comparable sales when closed, or they might have selected comparable sales from the wrong neighborhood. Request a copy of the appraisal report from the buyer, then contact the lender and ask about their dispute practices. Have your realtor submit property sales and give reasoning of why certain properties should not have been considered in the original appraisal. Only the lender can insist upon a second appraisal, and typically only the buyer can make a request for another, which may or may not be honored.
If you would like more detailed information on your local market or would like to determine the value of your home, please give the Paradise Team a call at 732-899-3338.
