A contract has been accepted on your house, Buyer and Seller have agreed to a price but we must now get past the appraisal, if the buyer is getting a mortgage to purchase the home. Today we will explore what takes place during this phase of the transaction.
A home appraisal is a third-party estimate of a property’s value. Since the property is being used as collateral to secure a loan, mortgage lenders require an appraisal be completed to ensure that the value meets or exceeds the agreed purchase price. With this assurance, the lender can be confident that if the prospective buyer falls on difficult times and defaults on the loan, the monies can be recouped by foreclosing and selling the property.
To ensure an absolute objective opinion of value, lenders today generally use a third-party service to assign appraisal orders to local licensed appraisers. This “firewall” was created to preclude any collusion between lenders and the appraisers in the field, who are charged with determining fair market value of each property-without any undue influence.
A home’s appraised value is based on a variety of factors such as square footage (both above and below ground level) number of bedrooms, bathrooms, location and general condition. What a property has previously sold for or what an owner may have invested have little to no bearing on the current fair market value of a property. In addition, what a neighbor says the home is worth or the price a competing home was offered for sale at, but did not close have no bearing on the appraised value of a property.
The appraisers job becomes more challenging in a market like we are experiencing in 2016-2017, with rapidly rising home values. Appraisers must establish current values using recently sold data, so relative comparable sold homes quickly become “dated” in our current market. Consider for a moment, the average home price in our region increased by 9.9% in 2016 and YTD in 2017 we have seen the average price move up +11.3%. You can see how a home which sold just one year ago in May of 2016 may not reflect the values that same home could demand this year.
So what happens when an a buyer and seller agree to a price, but the appraiser cannot validate the value with recently sold property data. This scenerio is becoming an increasingly common problem in today’s real estate market. The choices are few, but include: a)the seller agrees to accept the lesser amount, b)the buyer works with their lender to put more money as down payment in order to maintain the loan % to value or c) the agreement terminates and both parties are released.
The third scenario does come with some potential after effects. With FHA and VA loans, the appraisal remains of record for 6 months, so in essence the seller may be “stuck” with this value if a subsequent buyer wishes to use the same loan type. A new appraisal would be ordered if the next buyer uses conventional financing.
Once again you need an experienced Realtor affiliated with the Greater Chattanooga Association of Realtors to guide you through this step of the sales process.
The Greater Chattanooga Association of REALTORS is The Voice of Real Estate in Greater Chattanooga. The Association is a regional organization with more than 1,700 members and is one of more than 1,400 local boards and associations of Realtors nationwide that comprise the National Association of Realtors.
GCAR services Hamilton and Sequatchie counties in southeast Tennessee, and Catoosa, Dade and Walker counties in northwest Georgia. Go to www.GCAR.net for more information