A Home’s True Value – Purchase Appraisals in an Inclining U.S. Market
For many years now, we have been in an inclining—as opposed to declining—real estate market in the U.S., with the seller’s market performing exceptionally well in many areas!
Why is the market so hot?
Mainly fueling this robust period is a shortage of inventory. It is not uncommon to have one, two, or three offers on a well-priced property. When this happens, realtors urge buyers to present their “highest and best” offer, which typically drives buyers to make an offer above asking price. The seller must then select which offer is best and typically accepts the highest offer. A higher price generally results in a happy seller, but there is more to the story.
What is a purchase appraisal?
In accepting a higher offer, a new “market value” of the home is created; however, this can be a concern when and if the buyer applies for a mortgage and an appraisal is completed. The job of a purchase appraisal is to determine value based on historical sales of similar homes.
How are homes valued in an inclining market?
Appraiser guidelines support value based on the historical data of comparable sales—typically within the last 90-180 days—in close proximity to the subject. Market value does not necessarily equate to appraised value. A lender will only lend based on the lower of either the appraised value or the purchase price.
Example: A home sells for US$200,000 and the buyer is planning to put down 20%, but the appraisal comes in at US$190,000. Using the US$190,000 appraisal, the borrower’s US$160,000 loan request is now only 16% down instead of 20% down, and the loan is now subject to private mortgage insurance (PMI). The loan can still proceed if the borrower accepts that additional cost, or the borrower can increase the down payment to maintain an 80% loan.
In the current market—with inventory low and homes selling quickly at a high price—an appraisal can be a lagging indicator of value.
How can relocating employees protect themselves on their new home purchase?
- Work with their realtor on a realistic offer. If paying over list price—and an appraisal does not support that value—be prepared to put more down or negotiate with the seller to meet in the middle.
- Talk to the loan officer about this inclining market to understand available options should an appraisal come in low but the employee chooses not to put additional funds down.
What does this mean for our clients?
Our clients may also find this as a challenge when they are offering home sale benefits to their relocating employees. Let’s use the same example provided above (but in this case the employee is the seller and accepts an offer for US$200,000) where the home appraises at US$190,000. If your policy is designed so that Cartus acquires the employee’s property based on the buyer’s mortgage pre-qualification and does not require the appraisal contingency to be removed, the delta will be the financial responsibility of the client if the buyer requires a price reduction. Further, if new terms cannot be agreed upon, the sale may fall through, resulting in additional marketing time and carrying costs.
What can our clients do to reduce financial risk?
Always review the case with your Cartus Account Manager. While dropping the price may seem like a costly choice, your Account Manager can help weigh this against the proposed carrying costs of a sale that falls through. An alternative is to negotiate up front with the buyer that any delta up to a set dollar amount will be covered by the buyer either by a larger cash down payment or by paying any needed PMI.