"Am I paying too much?” The Appraisal Dilemma

I've been a REALTOR® for nearly 15 years, and in Las Vegas, that means about 10 years in a seller’s market and 5 years in a buyer’s market during the recession years. IN other words, it’s almost always a seller’s market in Vegas, and that means a continual challenge which is appraisal issues.

 

Right now as the market has been hot, this issue takes center stage again. I always like to explain it to clients this way... 

 

A. Market Value vs Appraised Value

 

Market Value = What a buyer is wiling to pay as of TODAY for the property (and technically what a seller is wiling to sell for). Buyers always buy based on their other options, even in a market with lots of inventory. They may look at comparable for negotiation purposes, but not typically to decide which house to buy. 

 

Appraised Value = One appraiser’s educated, informed opinion on the value of the property, based on recent closed sales. An appraiser can only look at history, which in a declining or appreciating market, is not always an accurate representation of the present value (aka market value). Many times, they are the same, but the issues arise when the appraised value is lower than market value. 

 

B. Buyer's Market vs. Seller's Market

So how does this affect a home buyer or home seller? 

 

1. In a Buyer’s Market (in Vegas, we’ll call this any market with more than 90 days of inventory): 
   • Appraised Value is Typically More than Market Value. An appraiser can only look at comparable final sales that closed in the past (within the past few months), and the market is slower now. Therefore, the buyer may be paying less than the appraisal will indicate. 
2. In a Seller’s Market (which Vegas almost always has): 
   • Appraised Value is likely to be Less than Market Value. An appraiser can only look at comparable final sales that closed in the past (within the past few months), and the market is more active now. Therefore, the buyer may be paying more than the appraisal will indicate, because market value is higher.

C. The Appraisal Comes in Low...

 

Nothing sinks an agent’s stomach like a low appraisal. It’s a common, but never welcome monkey wrench. In theory, if I represent the buyer, I may be able to negotiate a lower price, but in a seller’s market, that is tougher to do. Typically in a market like today (low inventory, rising prices), the buyer may have to make up some or all of the short fall. So how does this work?

 

Buyer pays cash over their loan to cover the gap between sales price and appraised value. Or seller reduces the price, or some combination of the two takes place.

 

Buyer: $200,000 Loan Amount, $250,000 sales price. Buyer is putting 20% down or $50,000. If the appraisal comes in at $235,000, and the buyer wants to continue to put 20% down, they will only be able to get a loan for $188,000 on this house. They would need to come out of pocket $62,000 in order to complete the deal if the seller will not reduce the price.

 

D. How Do I Advise the Client? 

 

The question becomes is this a good thing or a bad thing for a buyer?

 

It always comes down to choices. In a market that is appreciating rapidly, and a home that really meets the buyers needs, this is not a bad strategy. Some homes have features that are hard to appraise, or have an outsized value to the buyer, like a pool or large yard, or nice upgrades. It’s possible the NEXT house may cost the buyer even more money. As an agent, I take it on a case by case basis, and advise the client based on their situation and the home in question. Many buyers can not afford to do this, and that’s an important conversation I have right at the Dream Home Consultation up front. 

 

The good news is most buyers don’t have an extra $10-15K in Vegas, and with a relatively low number of cash buyers, that may keep t he appraisal gaps from getting out of hand, as they did in the 2004-2006 hyperinflated market. To me a $10-20K gap is reasonable depending on the price range and home. Anything higher is a sign of a potential bubble market. 

 

It’s getting tough out there - good luck to you and your clients and hopefully you can find a good accommodation with the seller when you inevitably encounter the low appraisal.