The temperature is up, and so is the demand for residential real estate. Traditionally this is the time of year that people are moving to new homes, and this year is no exception.
However, what is exceptional is that we find ourselves in what is very much a seller’s market, meaning there are more buyers than listed homes.
This uneven relationship is causing increasing prices all over the country. The median sale price in the Greater Chattanooga area rose 16.9% in just one year, from $216,000 in April 2020 to $252,500 in April 2021.
In this competitive environment, some buyers are offering well more than asking price. Once their offer is accepted, the buyer might start celebrating. But not so fast.
Let’s examine a scenario in which the property doesn’t appraise for the contract price.
A home is listed for $525,000, and the parties bind a purchase agreement for $550,000. The seller is excited to garner an offer of more than asking price, and the buyer is glad to have a frantic multiple-offer scenario behind them.
The buyer’s lender orders the appraisal, which comes back at only $500,000. In the industry, we refer to the $50,000 differential as the appraisal gap.
Before we start blaming the appraiser, let’s consider that all Realtors, including those specializing in appraising, subscribe to the Realtor Code of Ethics. Article 11 of the Code requires Realtors, when preparing value or price opinions, to:
• “Be knowledgeable about the type of property being valued
• “Have access to the information and resources necessary to formulate an accurate opinion
• “Be familiar with the area where the subject property is located unless lack of any of these is disclosed to the party requesting the opinion in advance.”
As Realtors, appraisers have access to the sold data in the multiple listing service and use comparable data – “comps” – to support the appraised value. With the continued increase in the median sale price, it should be easy, right?
Not necessarily.
The median price represents the entire market area, and comps include the actual (not median) sales price for similar (not just any) homes in the same or nearby area.
Even though the median price has increased during the last year in submarkets across the Greater Chattanooga region, such an increase doesn’t happen overnight. Remember that we’ve watched inventory levels shrink for the last several years, so it takes time for “comps” to catch up and for there to be ample supporting comps to support this recent growing trend of offers above the asking price.
So, what happens when the seller and buyer are faced with an appraisal gap?
First, we turn to the purchase agreement, which typically provides two options:
• The buyer can waive the appraisal contingency and agree to provide the additional funds to cover the gap.
• The buyer can terminate the agreement and be refunded their earnest money.
If the latter option is chosen, the seller is discouraged by dashed hopes of making more than anticipated on the sale, and the buyer starts over on the home search.
A third but uncommon scenario is for the seller to agree to sell at a lower price to the original asking price or negotiate with the buyer to pay a portion of the appraisal gap.
Buyers are trying to overcome this gap with other solutions – waiving home inspections or agreeing they will only negotiate for repairs of any major issues discovered by a home inspection.
In a normal market, buyers will sometimes request that the seller make repairs to the property that are discovered by the inspector. Some prospective buyers are waiving inspections all together, which buyers might come to regret down the road.
This fast and competitive market is not for the faint of heart, as this is the most competitive market I’ve seen in my 25 years as a Realtor. I urge my fellow Realtors to explain upfront to their clients just how unprecedented this market is and about the potential appraisal gap and potential options for overcoming it.
To remain competitive requires us all to adapt and approach the process with the mindset that this might be a longer process that will undoubtedly require them to reassess the amount they’re willing to spend. Realtors work to make homeownership a reality for everyone. That’s Who We R.
Greater Chattanooga Realtors is The Voice of Real Estate in Greater Chattanooga. A regional organization with more than 2,400 members, Greater Chattanooga Realtors is one of 300 local boards and associations of Realtors nationwide that comprise the National Association of Realtors®. Greater Chattanooga Realtors service Hamilton and Sequatchie counties in southeast Tennessee, and Catoosa, Dade, and Walker counties in northwest Georgia. For more information, visit www.gcar.net or call 423.698.8001.