Everything You Need to Know About Appraisal Gaps
If you’ve been on either side of the home buying or selling process lately, you can likely attest to just how competitive the residential real estate industry is right now. Over the last decade, the Dallas-Fort Worth area has seen record growth and there are no signs of it slowing down anytime soon.
Bidding wars and houses going for thousands of dollars above asking price have become a daily occurrence. It’s definitely a sellers market right now but that doesn’t mean it’s without its challenges, whether you’re the buyer or the seller.
It’s the natural effect of supply and demand. There’s a lot of buyers out there looking for homes in the greater Fort Worth area and not enough homes. This causes prices to rise, houses to appreciate in value which can make the financing aspect of buying a house trickier than usual.
Whether you're buying or selling a home, a critical step of the process is the home appraisal. Not only is the home appraisal step stressful for both sides, it also occurs after the buyer and seller have agreed upon a price.
As a buyer, a key part of getting a mortgage is having an appraisal performed to confirm the sales price for the lender. For sellers, a good appraisal is important to secure the best price possible for your house.
Needless to say, it’s an important, and often stressful step, when it feels like you’re so close to the finish line.
What is an Appraisal?
An appraisal is an unbiased, professional estimate of the value of a property for sale, required by the home buyer’s lender. Lenders (IE - the bank who is providing the financing for the buyer to purchase the house) require a home appraisal before they'll issue a mortgage to the home buyer because they want to make sure the value of the property is in line with the financing they’re providing.
Appraisers are licensed and certified professionals who are unbiased and have no direct or indirect interest in the buying or selling of the home.
How the Appraisal Process Works
The appraiser will analyze the neighborhood where the home is located, as well as the details and condition of the house to provide an assessment of the fair market value.
The most important component involved in determining a home’s value are comparable sales, also known as “comps.” These are similar properties, usually located within a mile or so of the home being evaluated, which have sold in the last 90 days.
The appraiser compares several of the property's features against the comps to arrive at the value. These include square footage, appearance, amenities and the overall condition of the home.
For example, a large four-bedroom home in an area where mostly three-bedroom homes have recently sold will likely have a higher value than those comps. Likewise, a house with peeling paint and a patchy lawn in a well-manicured subdivision will typically appraise at a lower value than otherwise similar properties.
The appraisal process typically takes three to 10 business days (it can feel like an eternity to everyone involved). Once it's complete, the report is usually sent directly to the lender. In a competitive commercial real estate market like this, we’re encountering more and more “appraisal gaps.”
What is an Appraisal Gap?
This is when the official appraisal, using all of the factual things that an appraiser takes into consideration, comes in lower than what the buyer and seller have agreed upon as the sales price for the home.
As you can probably imagine, it’s not an ideal situation for anyone involved in the transaction but it’s becoming more and more common because of the supply and demand of homes in the Fort Worth area.
Home buyers are simply willing to pay more than what a home is technically “worth” because of a variety of reasons - supply being a large part.
How to Handle an Appraisal Gap
It’s easy to take your frustration out on the appraiser but they’re hired to be the unbiased opinion, when emotions are running high on both sides.
Ultimately, knowledge is power. The best thing you can do is understand an appraisal gap may impact your transaction if you’re buying or selling. And given today’s market, it’s probably a good idea to discuss a game plan with your real estate agent on how you’ll handle the situation, whether you’re the seller or the buyer.
If you do encounter an appraisal below your contract price, know that in today’s sellers’ market, the most common approach is for the seller to ask the buyer to make up the difference in price. Buyers, be prepared to bring extra money to the table if you really want the home.
Above all else, lean on your real estate agent. This is why you hire us. We’ll help you understand all your options and handle any additional negotiations that need to happen.
Remember, that’s a huge benefit in hiring a realtor is that we live and breathe this crazy world on a daily basis and are equipped to give you the best advice possible, based on what we’re seeing in the market.
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