What to Expect as Appraisal Gaps Grow
Appraisal gaps are a serious issue in real estate today. Many clients worry about being “shortchanged” when they apply for their next home loan or when they buy a home to rent. What is the reason for this problem? One of the main reasons is because appraisals fail to reflect true market values. It’s important to understand why this is the case before you jump to conclusions and make decisions based on your own standards that may cause you to be shortchanged.
One reason why some appraisal gaps are so wide is because they occur after the buyer has accepted a contract. Once the buyer signs the contract, the seller’s appraisal no longer needs to be considered. This means that the original appraised value was already exceeded by the buyer’s contract price. Even if the contract price doesn’t reflect an accurate value, the buyer shouldn’t worry because the seller has already agreed to cover any gap. When an appraisal failure occurs, the responsibility falls back on the seller to bring the contract price up to what was expected.
Another reason why real estate contracts often don’t reflect true market values is because lenders often inflate them. They may tell a potential buyer that the house is worth a lot more than it is. The seller may try to convince a buyer that he or she should use the contractor’s appraisal to make the purchase. However, if the contract price is so much higher than the appraised value, the buyer may wonder why the seller would allow the contract to be so over-priced.
Other reasons why appraisal gaps grow are because real estate markets have very seasonal trends. Economists tend to feel that a housing cycle takes four to six years to develop. Homes hit hard at the beginning of the cycle, prices go up for a while, and then they fall back down. Over the course of the cycle, people sell off their homes, move to other neighborhoods, and purchase new homes. These factors make it difficult to determine what the true market value of the property actually is at any given time.
One potential reason for the seemingly endless gap in appraisal prices is that the market may not have reached the point where all available data are available. If there is a gap between supply and demand, there will be higher prices than what the buyer can afford. If the seller tries to convince a buyer that he or she can afford the home without looking at all of the available information, the buyer may refuse to sign the agreement. This can result in a real estate agent who has never experienced a buyer refusing to buy.
There is also the possibility that a buyer may be looking at a home that is not worth buying. Some buyers are simply unwilling to walk away from a deal. Other buyers may believe that the seller has underbid the price. In these situations, the seller’s offer may be too low. The seller may attempt to negotiate additional terms, but this generally leads to an increase in the asking price.
On the flip side, what to expect as appraisal gaps grow is an appreciation of the property’s value. When the number of potential buyers decreases, the price of the property typically increases. This is because more people will be willing to pay the asking price if they believe they are getting a good deal. A home that is undervalued is likely to appreciate faster than one that is truly overvalued.
As you can see, there are many possibilities with what to expect as appraisal gaps grow. It is possible that you will encounter a situation in which the price of your home doesn’t change for several months. This is a unique situation and you should work closely with your real estate investment questions and concerns to make sure you have an accurate expectation. You should also know when it is best to act and when to back off.