The importance of recent comps in any real estate transaction – by Joe Santoro, of Personal Property Managers.
2014 is shaping up to be a very strong year in the turnaround of the real estate market.
One of the key components to any real estate transaction is a home appraisal. It is extremely important and most folks do not understand it. Did you know that even if both sides; the buyer and the seller agree to a sale price, the deal can potentially unravel if the home appraisal comes in below the contracted selling price?
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How can a home sale unravel when both the buyer and seller agree to a selling and purchase price? Itss because most buyers will need some form of bank financing. Most lenders today will end up to a specified percentage of a home’s appraised value. If for example, the home appraised value is less than the selling price, the bank or lending institution will reject the loan, thus terminating the deal. So if you wish to purchase a home for $400,000 and the seller agrees, and then the bank appraisal comes in at let’s say $365,000, the bank will deny the financing. When this scenario occurs, the seller may not want to drop the price of the home. The buyer may not have the available cash to make up the difference or may not be willing to pay more than a home’s appraised value. As a result, the transaction could fall apart. Real Estate experts say it’s important for all parties involved to understand the reasons for low appraisals and the options available.
One of the reasons we are seeing low appraisals today stems from the fact that due to current market conditions, available housing inventory has decreased and sellers are able to get a bit more for their home. Unfortunately, many of the comps (comparables) that appraisers currently are using do not support these increased home prices. It all goes back to pricing a home correctly and positioning a property in line with the neighborhood. For example of other comparable homes within a neighborhood or surrounding area are selling for $325,000 and the seller lists a home for $375,000 and is offered say $350,000, there’s a chance the home will not appraise because comparable homes have sold at much lower prices.
There is a difference between appraised value and current market value. The appraiser’s job is to look at comps and try to find something that closed or settled as recently as possible. In some cases the appraiser is looking at properties that closed 6 to 12 months ago. In many ways that was a different real estate market. Today we are dealing with low inventory, a better economy and even pent up demand for housing.
A disconnect between appraised value and desired selling prices can occur when a lack of recent comps is available and an appraiser is looking at home that sold many months ago, thus effecting its price.
In addition, did you know that a neighborhoods recent foreclosures and short sales, which often times sell for far less than market prices count as valid comps and can impact a appraisers evaluation of a house?
Most appraisers welcome input and examples of recent comps from seller agents. It’s just another perspective for them to consider.
An agent’s involvement and perspective is particularly valuable if an appraiser is not familiar with the market area in question.
So, what should a buyer do when an appraisal situation arises that could negatively impact a real estate deal? Do not assume that all is lost…at least not immediately. Working with an experienced real estate professional who knows the market can be particularly helpful when dealing with a low appraisal.
If an appraisal comes in low, the choices usually are: the buyer comes up with more of a down payment, the seller lowers the price of the house or the two parties agree to meet somewhere in the middle. When faced with a low appraisal it almost always becomes a re-negotiation situation. Usually it all comes down to a buyer and seller motivation, and what each party is willing to do in order to make the deal happen. Understand that every situation is different and must be examined on a case by case basis.
For more information on real estate transactions please contact Joe Santoro, a senior real estate specialist, with Every Home Realty servicing New Jersey and Pennsylvania or visit Personal Property Managers at 215-485-9272 or 908-368-1909 www.personalpropertymanagers.com