Contract prices for properties being sold are skyrocketing, however that is only part of the equation in many cases. Given the fact that most properties are being purchased with a financing contingency, this also means that the property must appraise for the contract sales price or higher. In many cases, this can prove to be a stumbling block for many deals. With many buyers often paying above asking prices for homes in bidding wars, having the property appraise for the contract amount can prove to be challenging. According to data from CoreLogic, approximately 13% of appraisals came back below the contract price in the month of August. In fact, the month of May saw 19.7% of appraisals come in below the contract price. For perspective, in January 2020 only 7.3% of appraisals came in below the contract price.
Options with a low appraisal
A low appraisal is a risk that both buyers and sellers take when executing a sales contract with a financing contingency. This can be particularly problematic in the event of a buyer’s dollars being stretched as a result of a bidding war. Should the property not appraise, buyers and sellers have the following options:
- Buyer must pay the balance: If there is a shortfall with the appraisal, the buyer may pay the difference in order to close the gap. Of course, this is not always a financially feasible option for the buyer.
- Renegotiate the contract: If the seller is agreeable to the lower appraisal price, the contract may be updated to reflect the new sales prices matching the appraisal. Of course, this is less likely to occur in a seller’s market.
- Terminate the contract: The final option is to simply terminate the contract should the seller not be agreeable to the lower appraisal price or the buyer not be able to pay the difference. Unfortunately, with prices rising so rapidly over the past 18 months, this has been a common occurrence.
In a separate poll by the National Association of Realtors®, 12% of all contracts that were either closed or terminated were impacted by appraisal issues. For perspective, about 9% of all contracts were impacted by appraisal issues before the pandemic in August 2019. One strategy that is being implemented by some buyers in this market is to put down lower down payments. In doing so, they remain with a stronger cash position in the event that there is a shortfall with the appraisal. If so, they simply utilize their cash to pay the difference in order to still keep the transaction alive.
As for sellers, we are seeing more listings only considering cash transactions in order to avoid the potential pitfall of a low appraisal with a financing contingency. With more and more cash buyers entering the South Florida market from other higher priced markets, this strategy has been effective for some sellers. Of course, as the market cools off we expect to see this tactic being utilized less frequently.
At Live South Florida Realty, Inc. we have assisted many clients build their real estate investment portfolios. Are you looking to buy or sell a property in South Florida? Now more than ever, it is critical to have a qualified real estate team and the proper search tools behind you. Live South Florida Realty, Inc., has been a leader in the South Florida market for many years. Let our team of professionals assist you with buying or selling your piece of paradise today! In addition, our recently launched “Florida Home Search” app is now available on the Apple App Store and Google Play Store. With real-time MLS feeds, this app lets you set your own alerts to notify you as soon as a property meeting your needs hits the market. Furthermore, it will also let you know of recent closed sales in your area so that you may be even more educated on the market. Be sure to download this app for your smartphone or tablet today!