Housing Market: Bidding Wars Are Creating Appraisal Problems for Some Buyers

Real Estate News: Real Estate Investing Podcast

Home buyers are making all sorts of sacrifices in today’s market. Without enough homes to meet demand, some buyers are eliminating contingencies and offering way more than the listing price. That may be a simple transaction if you’re paying cash, but for those getting a loan, a “gap” between the sky-high amount offered to clinch the deal and the appraised value of the home could be a deal breaker.

A lot of buyers are resorting to extreme measures to win the home they so desperately want to buy. They may offer $50,000, $100,000 over asking and waive ALL contingencies, meaning that if they back out, they lose their deposit.

And then when it comes time to get the house appraised, buyers are finding out that the lender will only cover, let’s say, 80% of the appraised value. That means the buyer’s down payment must include the other 20% PLUS any amount the buyer offered to win that home. That’s left some buyers scrambling to make up the difference for what’s being called “the appraisal gap.”

HousingWire heard from a few loan officers who say that some people are caught off-guard, and are borrowing from relatives or tapping into retirement and stock-trading accounts to make up for that gap. Those distributions can also trigger tax events, making the purchase that much more expensive.

But the problem isn’t just that buyers are bidding the prices too high. Some real estate experts feel that many appraisers have not caught up to a market that’s been accelerating rapidly. They rely on historical data which doesn’t reflect what’s happening today. One Southern California processor told HousingWire that “almost all of the appraisals lately… have been low, by a lot.”

HousingWire reports that: “While some appraisers understand the increasing market and try to justify soaring prices, others are not comfortable with the new reality and provide valuations more in line with previous sales.”

The situation can lead to a costly mistake for buyers who have written a non-contingent offer. With no clause that allows them to back out of the deal, they must come up with the additional cash. If they can’t, the deal will likely collapse and they’ll lose their deposit. But it may also be possible to challenge the appraisal.

A buyer or buyer’s agent might be able to offer comps that justify a higher amount, or maybe hire another appraiser for a second opinion. Finding another lender could also get you another appraisal but you’d have to make sure the new lender doesn’t use the same appraiser.

Doing more to prepare for the appraisal gap could also help. Maybe getting those comps ahead of time, and making sure there’s a little extra cash in the bank for a bigger deposit. If not, lower the dollar amount being offered, and maybe avoid an offer that doesn’t give you an out.

Real estate agents can also help by educating their clients about the pitfalls of a non-contingency offer that’s substantially over the asking price.

For real estate investors who’d like to learn more about appraisals for investment properties, you’ll find a few videos on our website at NewsForInvestors.com. We’ll also have a link on the podcast player page for this episode to those videos.

Video Link: https://www.realwealthnetwork.com/learn/how-to-read-appraisal-report-investment-property/

Links:

1 - https://www.housingwire.com/articles/the-appraisal-gap-is-complicating-deals-across-the-country/

2 - https://www.inman.com/2021/03/23/how-to-protect-your-buyers-from-appraisal-catastrophes/

3 - https://www.foxbusiness.com/money/how-to-refinance-mortgage-low-home-appraisal