Low Home Appraisals Can Make Buying Risky: Here’s What To Do
PEORIA – While valuation has always had the potential to put a damper on a home sale, this year’s hyper-competitive real estate market has amplified that risk.
With impatient buyers bidding thousands of dollars above the asking price, the risk that the appraisal ordered by the lender will not cover the agreed selling price has grown. Knowing the risk, buyers got creative. Some agreed in advance to cover the additional costs if the property was in low esteem.
“I had a transaction this year where the buyer agreed to do it,” said Jason Catton, agent for Realty Executives Acclaimed and president of the Peoria Area Association of Realtors. “He said, ‘If you’re worried about the sale price, I’ll make the difference if it’s not appraised.’ ”
If a seller is able to buy a property for cash, they can choose to forgo the appraisal altogether. This option is not without risks, however, if the buyer wants to recoup the cost when selling the house later.
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Buyers dependent on finance have fewer options. They can cover the extra cost in cash or renegotiate the price.
“The buyer can come back to the seller and say, ‘This is what the house was appraised for and this is what I’m willing to pay,” Catton said. “In most cases, the seller would accept this appraisal price.”
While this year’s competitive market created some additional issues with the valuation process, it’s an issue that’s always been around, said Suzanne Monen Miller, agent at Jim Maloof Realtor. Miller recalled a sale in 2020 when a low valuation caused a domino effect in the sale of several homes.
“It was right before COVID hit. We got an offer within one day, which was great, especially during the winter, ”Miller said. “My people were buying a bigger house and they had an offer subject to closing their current house. So you had my people, and you also had the family whose house they were buying, who were also buying a house. So each transaction was like a domino effect, you had to close this one to go to this one to go to this one. Then I got a call from the agent who brought us the offer, and he told me the valuation was low.
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Real estate agents base the listing price of homes on comparable homes in the same or similar neighborhoods, but once the deal is done, lenders ask their own appraisers to assess a home’s value. and sometimes those numbers don’t match.
“So we’ve all tried to think about how we can make it work, because we don’t want nobody out. We didn’t want one party to have to pay $ 5,500 to get the house they want. … There could have been a lot of problems. So what we ended up doing was every agent on either side was awesome. We’ve all tried to work together, ”Miller said. “The clients who bought my buyers’ house waived the appraisal, my buyers gave them a certain amount of closing costs to offset what they had to pay, and the person’s house my people were buying, they paid us the closing costs. So everyone kind of kicked around to help. ”
It was an unusual transaction, starting with the fact that the house sold in one day at that time. This year, quick sales have been extremely common.
“We didn’t know the term quickly, or really, really quickly, until last spring. Houses were literally flying off the shelf, you just couldn’t keep up, ”Miller said.
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While the market has slowed slightly now that summer draws to a close, it remains very competitive. The good news is that valuations have started to catch up with the current market situation, Catton said.
“Once enough numbers came in, appraisers had the numbers to justify a sale,” he said. “But when you are at the start of a market like this, there is a period of time where you will see houses not valued because we had not yet started that appreciation.
Low valuations have become less of a problem in recent weeks.
“It’s a little difficult when you have multiple offer situations and all the offers were great offers, it’s a little difficult, I think, for an evaluator to come out and say, ‘Well, the market value would not be that. “”
Leslie Renken can be reached at (309) 370-5087 or [email protected] Follow her on Facebook.com/leslie.renken.