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While this is generally a good thing — especially if you’re a homeowner! — a market that is almost too hot can be troublesome for hopeful buyers. Due at least in part to the coronavirus pandemic, 2020 was an explosive year for real estate, with multiple-offer scenarios commonplace from coast to coast. This type of market causes home values to escalate quickly, faster than appraisers can keep up with.
The list price of a home is usually established based on recent sales of comparable homes (comps) within the area. Although “recent” can be subject to interpretation, industry standards tend to consider this to mean sales that transpired within the last six months. But here’s the thing: When home prices are rising fast, comps that are six or even three months old might be too outdated.
“In a competitive market, oftentimes the buyer will make an offer above the list price,” says Fuller. “When the seller accepts, that offer may be higher than anything else has sold for in their community.”
So if the seller is earning a nice price, and the buyer is willing to pay, what’s the problem?
Well, according to a 2020 trends report put out by the National Association of Realtors®, 86% of homebuyers are financing their purchase. This means that an independent appraiser has to step in and assess the value of the home in order for a lender to agree to provide the commensurate mortgage. If the offer on a house is above and beyond the recent local norms, the appraisal may come in low, and lenders aren’t going to loan a buyer more money than a house is actually worth. So if an appraisal comes in lower than the offer price, it can put the deal in jeopardy.
Fortunately, Fuller has lots of expert advice and has shared four ways to navigate appraisals in a hot market and avoid purchase delays — or worse, becoming part of the 13% of transactions that fall apart due to appraisal issues.
1. Stay ahead of the game
When it comes to avoiding valuation mishaps, prevention is key. Especially in a fast-paced market, you simply won’t have the time to wait and prepare an argument after receiving a low appraisal report — you’ll want to mitigate the odds of that happening right from the start.
“The No. 1 way to minimize the chance of an appraisal coming in low is to provide the best comparable sales and active listings in the community to the appraiser,” says Fuller.
“Appraisers appraise a wide variety of properties in a wide variety of communities; they don’t always know what’s happening on your street.”
An experienced agent, however, will know the market inside and out and will be well-prepared to advise you when a home runs the risk of appraising lower than its true market value; together, you can prepare a game plan prior to the appraisal. Your agent can track down comparable properties that are active, pending sale, or have recently sold at prices that will help to justify your seemingly generous offer better than months-old comparable sales.
Fuller cautions that some of these properties may have sold outside of the multiple listing service (MLS) and will have to be discovered through title companies. Homes that sold before they ever went to market and for-sale-by-owner properties are two common examples where sales prices may help your case, but the information won’t be as easily discoverable as with homes that have sold conventionally. An agent can be instrumental in helping you discover these deals.
2. Showcase those assets
Chances are, the things that attracted you to a home are also hot-ticket items for other buyers. There can be dozens of 2,000-square-foot houses with a garage and a fenced-in backyard in the neighborhood, so what makes this particular home stand out?
“Very beneficial in mitigating a low appraisal issue is providing the appraiser with a list of amenities and improvements that this property has,” suggests Fuller.
The key to this exercise is detail. Rather than simply noting that the home has a renovated kitchen, specify exactly when the project was completed, the age and brands of the appliances, the flooring and countertop materials, and so on.
“I want to see when those products were installed, and I want to see the amount of money the homeowner paid for those amenities to be installed,” says Fuller, who encourages offering as much information as possible.
“An appraiser can use this list to help accurately assess the home and give a premium to the appraisal because of amenities that neighboring properties may not have.”
When putting together this list of home assets, consider elements such as:
- Porches, decks, or balconies
- Sun rooms
- Covered patios
- Kitchen upgrades
- Bathroom upgrades
- Finished basements
- Green upgrades, such as solar panels
- … And anything else that is otherwise new, upgraded, or unique to the property!
3. Know the numbers
Fuller’s third strategy for overcoming appraisal challenges in a hot market involves the use of market statistics. Similar to providing the appraiser with comparable listing and sales information, having market appreciation statistics at the ready can help offset the chances of your home-to-be clocking in at a disappointingly low valuation.
“Some appraisers may assume that what’s happening in one community is the same as what’s happening in another, and nothing could be further from the truth,” says Fuller.
He describes real estate as a micro-markets community, which should make plenty of sense when you consider how a brand-new subdivision can crop up just a stone’s throw from a neighborhood that first flourished in the 1970s. Even on the same side of town, similarly sized homes with comparable features can carry vastly different values and rates of appreciation.
“Generally, lower-priced properties appreciate a lot faster in terms of percentage than the higher-priced homes, because there’s a greater buyer pool at a median price point,” Fuller explains.
While a 2019 data analysis by Black Knight indicates an average 3.9% appreciation rate over a 25-year period in the United States, if 2020 taught us anything, it’s to expect the unexpected.
Fuller shared that his local market — the San Francisco Bay Area — has been appreciating by a whopping 10% in the last year. So, if you’ve made an offer on a $500,000 home, a property of comparable size and amenities that sold just one year ago may have appraised at $50,000 less than what the market is actually capable of supporting today. While a quiet neighborhood in, say, rural Montana may not have the same bustling market of the Bay Area, real estate has always been a case of supply and demand.
With valuable statistics in hand, your agent can help the appraiser understand the nature of your hopeful home’s micro-market and, in turn, secure an accurate appraisal.
4. Put it all out there
Finally, to serve as the fourth pillar in strengthening your chances of a strong appraisal in a hot market, you can — and should! — provide the appraiser with a copy of the purchase agreement.
While this may sound like a no-brainer, it’s not always a standard move. It’s also not uncommon for an appraiser to receive an early version of a purchase contract and have no idea that pricing or terms have changed since that draft was issued.
“In a negotiation, sometimes there’s an offer, and then there’s a counter-offer, then there’s another counter-offer along with an amendment and then an addendum,” warns Fuller. If the appraiser doesn’t have all of these components, they could be missing important information.
In short, be sure that the appraiser has the fully ratified, most up-to-date version of the contract prior to their inspection. It lends valuable context to what a buyer is willing to pay and under what circumstances.
Knowledge is power
While it is possible to prepare a rebuttal for a completed appraisal that you believe undervalues the property in relation to current market conditions, the process will certainly delay the transaction, and there’s no guarantee of a better outcome.
In fact, if you’re pursuing an FHA home loan, know that the appraisal process is slightly different, and that FHA appraisals are tied to the home, even if you change lenders, and they don’t expire for 120 days. It can be very difficult to order a second appraisal during that time — that’s an awfully long wait if you’re hoping to turn appraisal numbers toward your favor.
Regardless of loan type, if you’ll need a mortgage to purchase a home, and you don’t have a surplus of cash to make up a potential difference of tens of thousands of dollars, it’s important to provide the appraiser with as much relevant information as possible before they ever set foot at the home.
Rather than waiting for a possible low valuation, do what you can to mitigate those concerns upfront.
“There are certain things in a real estate transaction that, when discovered, can be fixed,” says Fuller. “If an appliance isn’t working properly, if there are plumbing issues or electrical problems — all of those things are typically very manageable.
“When you have an appraisal that is off by $50,000, $75,000, or even $100,000 — that is not fixable.”
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