Homeowners: Your Home Must Be Sold TWICE

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Once to a prospective buyer and then to the bank (through the bank’s appraisal)

In today’s housing market, where supply is low and demand is high, home values are increasing. Many experts are projecting that home values could appreciate by another 5%+ over the next twelve months. One major challenge in such a market is the bank appraisal.

If prices are surging, it is difficult for appraisers to find adequate, comparable sales (similar houses in the neighborhood that recently closed) to defend the selling price when performing the appraisal for the bank.

Every month in their Home Price Perception Index (HPPI), Quicken Loans measures the disparity between what a homeowner who is seeking to refinance their home believes their house is worth, as compared to an appraiser’s evaluation of that same home.

Bill Banfield, VP of Capital Markets at Quicken Loans urges anyone looking to buy or sell in today’s market to remember the impact of this challenge: 

“While a 1 or 2 percent difference in home value opinions may not seem like a lot, it could be enough to derail a mortgage.

A homeowner [or a buyer] could be forced to bring more cash to closing in order to make a mortgage work if the appraisal is lower than expected. On the other hand, if an appraisal comes in higher, they could be surprised with more equity than they had planned. Either way, if owners are aware of their local markets it will lead to smoother mortgage transactions.”

The chart above illustrates the changes in home price estimates over the last 12 months.

Headed to settlement next week with a happy couple buying a beautiful home in Herndon, VA. Due to the appraisal coming in over the sales price they have instant equity, BUT I am hearing from my colleagues that some of their appraisals are coming in low. Appraisals can be challenged and sometimes it's successful. If the property doesn't appraise for the contracted sales price the parities in the transaction have to make decisions. If the seller and buyer can agree, they can negotiate a modified sales price. If this cannot be agreed upon, the contract of sale can be voided. The challenge for the seller is with many loan types such as a VA loan, the appraisal sticks with the property for several months which limits the buying pool available to the property. 

Bottom Line
Every house on the market has to be sold twice; once to a prospective buyer and then to the bank (through the bank’s appraisal). With escalating prices, the second sale might be even more difficult than the first. If you are planning on entering the housing market this year, let’s get together to discuss this and any other obstacle that may arise.