Courtesy: Keeping Current Matters
Itâs economy 101 â when supply is low and demand is high, prices naturally rise. Thatâs whatâs happening in todayâs housing market. Home prices are appreciating at near-historic rates, and thatâs creating some challenges when it comes to home appraisals.
In recent months, itâs become increasingly common for an appraisal to come in below the contract price on the house. Shawn Telford, Chief Appraiser for CoreLogic, explains it like this:
âRecently, we observed buyers paying prices above listing price and higher than the market data available to appraisers can support. This difference is known as âthe appraisal gap . . . .ââ
Why does an appraisal gap happen?
Basically, with the heightened buyer demand, purchasers are often willing to pay over asking to secure the home of their dreams. If youâve ever toured a house youâve fallen in love with, you understand. Once you start to picture yourself and your furniture in the rooms, you want to do everything you can to land the property, including putting in a high offer to try to beat out other would-be buyers.
When the appraiser comes in, they look at things a bit more objectively. Their job is to assess the inherent value of the home, so theyâre going to study the facts. Dustin Harris, Appraiser Coach, drives this point home:
âItâs important for everyone to understand that the appraiserâs job in the end is to remain that unbiased third party, to truly tell the client what that home is worth in the current market, regardless of what decisions have been made on the price side of things.â
In simple terms, while homebuyers may be willing to pay more, appraisers are there to assess the market value of the home. Their goal is to make sure the lender isnât loaning more money than the home is worth. Itâs objective, rather than emotional.
In a highly competitive market like todayâs, having a discrepancy between the two numbers isnât unusual. Hereâs a look at the increasing rate of appraisal gaps, according to data from  CoreLogic (see graph below):
What does this mean for you?
Ultimately, knowledge is power. The best thing you can do is understand an appraisal gap may impact your transaction if youâre buying or selling. If you do encounter an appraisal below your contract price, know that in todayâs sellersâ market, the most common approach is for the seller to ask the buyer to make up the difference in price. Buyers, be prepared to bring extra money to the table if you really want the home.
Above all else, lean on your real estate agent. Whether youâre a buyer or seller, your trusted advisor is your ally if you come up against an appraisal gap. Weâll help you understand your options and handle any additional negotiations that need to happen.
Bottom Line
In todayâs real estate market, itâs important to stay informed on the latest trends. Work with a real estate professional to help you navigate an appraisal gap to get the best possible outcome.
