The Denver housing market is not the only one with a strong seller’s market. Across the country, real estate agents are reporting a strong sellers markets driven by lower unemployment and tight inventory of existing homes.
More people have more money and they want to buy homes, but with fewer houses to choose from, prices rise. (Economics 101) This is still a great situation when buyers want a house and sellers want to sell but an appraisal can sometimes throw a wrench into the deal.
Since mortgages are based in part upon appraisals, deals can quickly change. Appraisals trail asking prices because appraisals look to the past. ONLY SOLD PROPERTIES COUNT! Of course, a good appraiser will look at properties under contract and this might help boost appraisals. but they are not used as comparables.
In order to protect the buyer, our purchase contracts have an appraisal contingency stating that the property must appraise at or above the contract price. If the property appraisal comes in low, the deal changes. The buyer can put more money into the deal or the seller can agree to sell at a lower price. With a contingency in place, the buyer may terminate the deal and lose nothing if the appraisal is low. With that said some buyers who have the funds to put down regardless of how much the lender is willing to lend are willing to waive the appraisal contingency to get the house anyway.
Here is an example of what can happen. Let’s say a buyer has agreed to purchase a house for $500,000. The buyer agrees to put $25,000 down (5%) and hopes to finance $475,000. But the house appraises for $480,000. Now the lender will only finance $456,000 and, with the buyer’s $25,000, this doesn’t add up to the contract price of $500,000. Now, in order to make this transaction work (without renegotiating the contract), the buyer will either have to bring $19,000 more to the table or the seller will have to accept the $480,000 price.
Keep in mind that the less the buyer is putting down, the more likely the above scenerio can happen, but even if a Buyer is putting 50% down and the appraised value has no effect on the amount they need to borrow, the buyer might still want to renegotiate the price based on the fact they they don’t want to pay more, or much more than the appraised price.