What is this home worth? This is a question that real estate agents are constantly tackling with clients, during the offer-making process, once they've moved in, and when they're considering selling.
At the end of the day something is worth whatever someone will pay for it, but there is a caveat when dealing with a mortgage: what does the BANK think it's worth?
In a competitive market where homes are going "over ask" with multiple bids, this throws a wildcard into the mix and moves the conversation from "what's the highest bid" to "what's the highest bid that will actually work out?" And there is strategy involved on both sides.
xo
Anna
What’s The Deal?
The real estate market around the country, especially outside of cities, has been on a massive upswing starting a couple months into the pandemic. Average home prices are up double-digits year over year in most markets, and they keep climbing.
Although this is great for homeowners, it leads to confusion when pricing a home, especially if the goal is to get offers "over ask," in a market where people are getting a mortgage in order to buy.
Traditionally, an offer with financing is "contingent" on the bank agreeing to lend and issuing a loan commitment letter for the purchase price. If the bank doesn't think the home is worth as much as the contract price, they will only fund the loan up to their valuation. For example, a home is in contract for $600k but it appraises at $550k -- the bank will only loan X% of $550k.
If the offer is contingent on financing, the buyer can back out of the deal. To move forward anyway, or if the offer was NOT contingent on financing, the buyer must come up with an additional $50k or work with another bank (or get a second appraisal, but that rarely happens).
Agents are on the "front lines" of real estate, and we use all kinds of data, not just closed sales, when pricing a home for sale or evaluating a home's worth for an offer. We also look at these numbers in context, adding a layer of complexity often lost by appraisers, by choice or because they are often brought in from hours away and simply don't know. How can we navigate this?
For Buyers:
If you're a buyer in a bidding war, and you're deciding how to adjust your offer, be thoughtful about whether you think the home will appraise for the price you give, or make a plan to go in non-contingent on financing/appraisal. Super high, contingent bids will often be thrown out. And work with a local bank.
For Sellers:
In multiple bid situations where everyone is contingent, you will likely find yourself choosing an offer that isn't the highest number on the table. If the market is on a strong enough up-swing, a buyer will likely try to make it work even if the appraisal is low (since buyers know when prices are rising even if appraisers don't), but they need to have that cash on hand. This is why offers are considered holistically, and it isn't just the sale price.
For Appraisers:
Know the context of the market where you are. Understand what's been happening with prices, how long between contract and closings, and the specific product type. And review the comps that the buyer's/seller's agents provide rather than choosing arbitrarily, especially if that market isn't your stomping ground.
Why Does This Matter?
Because this is a massively impactful decision that's made, often by someone who isn't an expert in the exact sub-market, using information that is at least a couple months outdated. In NYC, because of the board package and building approval process, apartments go into contract months before they close, and then the actual sale price can take another couple weeks to be updated in ACRIS. I just closed a sale that went into contract in early January, so now that will be used as a recent comp despite the fact that it was negotiated in an entirely different environment.
In "normal" times this is generally ok, because pricing doesn't fluctuate all that much in a couple month period. But when markets are on fire and keep increasing the sales prices, or when you're in a place like NYC that is finally coming out of COVID and the many restrictions we've been under, this leads to low valuations.
This environment -- bidding wars and fierce competition where appraisals are an issue -- forces people to make non-contingent offers and hope for the best, which is risky unless undertaken with the utmost caution and professional guidance. It makes all-cash buyers even more appealing to sellers, which shuts first time buyers out of the market and leads to even more inequality in home ownership.
Is there a solution to this? Not really, because it's in the bank's hands. But everyone can do their best to prepare for the issue up front and get the deal done anyway. If there's strong communication between sides and everyone wants to make it work, that's about as good as we're going to get.