LOVELAND – Bidding wars become common in a seller’s market. With few listings and so much competition, prices can rise fairly quickly. Such increases can move so rapidly that appraisals are unable to keep up with them. Given that appraisals are key to buyers’ mortgages, this is an important consideration. Higher offers are not always better if a property fails to appraise for that higher amount. Here’s a closer look at why.
What is appraised value
Mortgage lenders order a formal appraisal, which is an analysis by a third party to calculate precise market value using approved methods. It takes into account sales of comparable properties within the last six months. Lenders use the appraised value to confirm that the amount they are lending for the home purchase is justified. Thus, it is extremely important.
Appraised values and loan amounts
Most loan programs require a certain down payment from the buyer. It is calculated against the sales price or appraised value, whichever is lower. For example, if the loan program requires 5% down and the purchase price is $400,000. The amount loaned will be for $380,000. The buyer’s down payment of 5% makes up the remaining $20,000. If the appraised value is only $390,000, then the lender will only loan $370,500. Thus, the buyer would be responsible for an additional $9,500.
Why appraised values matter to sellers
When properties appraise for lower than the sale price, this impacts both buyers and sellers. In most cases, buyers will attempt to negotiate down the price. Perhaps they don’t want to pay more than what the home is worth, or they simply do not have the funds to cover the difference. Either way, a higher price does a seller no good if the home cannot appraise for that higher amount.
Appraisal considerations in offer negotiations
Given the potential issue with appraised value, sellers must take recent sales into consideration when reviewing and accepting offers. A higher offer is not always a better one. Rolling closing costs into the purchase price and other sales price inflations may not be a good idea if the values potentially exceed expected appraised values. Discuss these matters with your agent to ensure that you are making smart decisions when it comes to accepting offers.