Be aware that low appraisals are back - Read on to learn how you can be prepared for this trend and avoid jeopardizing your purchase or sale of real estate.
Appraisals are increasingly becoming unpredictable, often coming in lower than anticipated. This trend can significantly disrupt your plans, whether you're purchasing, refinancing or buying a home. In the current market climate, delaying this step could jeopardize the entire transaction.
We’re seeing sale prices that aren’t supported by recent comparable sales. This is especially true when multiple offers push prices above what lenders consider fair market value.
Lenders don’t care what someone paid for a home—they care what an independent appraiser says it’s worth. And when that number comes in lower than expected, you’ve got a financing gap that unless the buyer can make up the shortfall with cash, the whole deal could fall apart.
That’s exactly why it is crucial that both buyers and sellers have honest and educated advice along the way.
This delay can be very costly in terms of time and money. Including a financing condition allows the Buyers lender and the mortgage insurance company to value the property and approve the price a Buyer agrees to pay for it, before considering it a firm sale.
Consider this situation. A Buyer offers on a property and does not include a financing condition because they have already been pre-approved and feel pressured due to competing offers. The sale firms up and the Seller proceeds to purchase their next house under the assumption that the buyer is going to close on their current property for the amount agreed upon. Now the buyer comes and says, oh no! My lender will not advance the funds to close because the appraisal did not come in as expected, putting the seller in a position where they cannot close on their new home a potentially causing a chain reaction up the creek.
Buyers sometimes feel pressured to go in firm when there are competing offers. As a Seller, it is not a bad idea to consider an offer with a financing condition as an extra layer of security to protect your own future interests. Firm offers without financing conditions can be risky in this market, especially when we are aware appraisals are sometimes falling short.
So what happens if the appraisal falls short?
Say the buyer agrees to pay $900,000 and the appraisal comes in at $800,000, the buyer will need to come up with the $100,000 difference in cash, (most likely not in additional credit) to close. As a buyer if you are okay with coming up with some extra cash, if the appraisal comes in low, you may want to opt for no financing condition. As always calculate your risks. As a seller who is considering an offer with no financing condition, ask questions and be sure you are satisfied with the buyers financial security.
When you are considering what may be one of the largest purchases you may make, it is critical to be sure you are working with trusted professionals who are experienced and knowledgeable about all the different things that can go wrong. The best professionals know the local market and know their profession. They have experience and understand the dynamics especially of pricing in the area where the home is being sold. Brant area prices are not the same at Hamilton, or Kitchener or Toronto. Call us today to learn more about how we not only help buy and sell homes but how we protect your best interests.
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