It all comes down to the sales price, the appraisal report value and the market trend over time.
In a typical market, the risk lies with the seller if the sales price for a property may be overpriced for the market. But, this is not your average market.
What happened, and why would a buyer today want to assume more risk?
In case you haven’t noticed, Flagstaff’s residential market is experiencing the hottest seller’s market in history. Home sales prices from this time last year to now, according to our local Northern Arizona Association of Realtors MLS, have jumped 29% overall, to an average home price of $678,695. Available or “active” listings in the same timeframe are down 22%.
Higher prices and limited inventory with shorter time on the market means buyers need to be as competitive as possible to get their offer accepted, especially if they are financing. Lenders and their underwriters require most buyers who finance their home purchase to order an appraisal report. Underwriters can only approve funding based on that value. Because cash buyers don’t need an appraisal, in order to compete with cash, most buyers today are opting to waive their Appraisal Contingency that is built into the Arizona Association of Realtors Purchase Contract. That contingency states if the property does not appraise for value, the buyer may cancel the contract, pay out of pocket for the difference between the sales and appraised value, or re-negotiate with the seller to reduce the sales price.
Here’s where the risk comes in. In the not-so-distant past, the seller with the financed buyer would worry that the appraisal might come in below the sales price. Now, when the buyer waives the appraisal contingency, the buyer takes the risk. It all comes down to the sales price, the appraisal report value and the market trend over time.
Jenna Vanderlip with Hometown Appraisal in Flagstaff explained that her appraisal reports are drafted on forms supplied by Fannie Mae, and must follow strict guidelines as well as the lender’s underwriter rules. Her appraised value must be supported by recent comparable sales in the same (or similar quality) area or subdivision. Although she sees the upward trend, it is about a month behind the current market. It’s like looking in the rear-view mirror.
As an example, imagine a financed buyer offers $550,000 for a home listed at $500,000 and waives her Appraisal Contingency. If that offer is accepted, the buyer’s lender orders the appraisal report. If the appraisal comes in at 500,000, the buyer must come to closing with an additional $50,000. If it appraises for $490,000, that additional amount is $60,000. You get the idea.
How can a buyer reduce or at least calculate this risk? No one has a crystal ball to truly forecast the future values of real estate, or what an appraiser’s opinion of value will be, but here are a couple ideas. Ask your realtor to pull recent SOLD comparables to estimate the potential appraisal report value for the property. Try to get at least three of the most recent sales. Once you have a range of “probable” appraisal values, talk to your lender. Ask your lender to predict, with the overall market sales data, how long it would take for your sales price to equal or surpass an appraised or market value. Will the value of that appraised $500,000 house eventually appraise for $550,000 by the end of summer? Or next year? Again, no one can predict the future, but armed with information from your realtor and lender, you can feel more comfortable about making that calculated risk and buying that house! FBN
By Paula Mack
Paula Mack, SRES, is a REALTOR with Russ Lyon Sotheby’s International Realty. She can be reached at 928-699-6837 or paula.mack@russlyon.com.
