An appraisal is a professional report that helps gauge a home’s value. In fact, a homeowner can get a home appraisal completed at any time. The reports typically cost between $300 – $600 and most often are ordered by the lender and paid for by the buyer. The most common situation in which a home appraisal is ordered is during the sale of a property, however they are also conducted for homeowners refinancing their homes as well.
The recent housing market has seen home prices increase at a rapid rate. With this said, some reports have shown that approximately 10% of all real estate deals have needed to be cancelled due to the home appraisal coming in lower than the contract purchase price.
What do home appraisers look for?
While a home inspector looks at the various functionalities of a home, a home appraiser is simply trying to gauge the condition of a home while also analyzing comparable recent sales in the market. Below are a few items that home appraisers typically look at:
- Age and condition of the home
- Size and square footage
- Necessary repairs that may impact value
- Upgrades or improvements to the home
- Construction details
- Lot size or zoning
- Amenities or special features
- Location
- Comparative market analysis (recent closed sales in the local market)
- Local housing market (Buyers or sellers market?)
Common reasons for a low appraisal
The current high demand from home buyers in South Florida has pushed prices higher at a rapid rate. With this said, much of this demand is also coming from cash buyers. Therefore, these buyers do not need a home appraisal conducted since they are not obtaining a loan for the home purchase. In the end, any property is truly worth what somebody is willing to pay for it.
When the demand is pushing prices higher at such a rapid rate, it creates challenges for appraisal values to keep up. Oftentimes, this leads to appraised values coming in lower than the contract purchase prices. Below are a few common reasons for low appraisals.
- Prices rising abruptly in a sellers market: Bidding wars are a common byproduct of a sellers market and often drive prices higher than what appraisals can support. (This is what is currently happening in the South Florida market.)
- Slowing or buyers market: When a market shifts towards more of a buyers market, many sellers may not be aware about how much their property value may have decreased. Therefore, this may lead them to overprice their home.
- Poor evaluation of the property: This is where an appraiser may fail to take upgrades, popular features, or upscale amenities into consideration.
- Inexperienced home appraiser: A poorly trained appraiser or one lacking the adequate experience in the local market may result in a low appraiser.
- Inaccurate or wrong comps: Comparable closed sales should be both recent and similar. Furthermore, other active listings on the market should not be considered. In some cases, properties that are not good comparable sales may be utilized in the appraisal report.
- Closing cost credits: In certain circumstances, a closing cost credit may have already been negotiated between the buyer and seller and this is reflected in the purchase price. This will likely mean that the appraisal would need to come in higher than it would have otherwise.
Summary
Home appraisals coming in lower than purchase prices is a common occurrence in the current real estate market in South Florida. Unfortunately, this is resulting in a disadvantage for buyers that may be seeking financing for a home purchase. To further exacerbate the situation, many cash buyers from other more expensive markets throughout the country are competing for homes in the this market. For this reason, it is even more important for buyers obtaining financing to act swiftly whenever a listing comes to the market. In many cases, homes are selling for above asking price. In these situations, it is a significant advantage for cash buyers that do not include an appraisal contingency.
If you are considering a home purchase in South Florida, it is important to have proper guidance in order to compete in this market. At Live South Florida Realty, Inc., we offer concierge-level service to all of our clients. Contact us today for your free consultation.
