While this Tip is #7, it should be #1 in the Central Ohio Seller’s market. Let’s start with the harsh truth and then I will break it down: It is virtually impossible to purchase a newly listed home without a willingness and ability to pay above the appraised value of the home.
Let’s picture the Central Ohio housing market as the bread aisle in the grocery store. There are five loaves of bread on the shelves marked at $3 each and 30 buyers who have come to the store to buy a loaf. With this uneven supply and demand, why are there even five loaves on the shelf? Because those loaves have mold. Or they are two weeks old. Or they are burnt on the bottom. The consumer has already looked over the existing bread inventory and (even in a time of bread shortage) has determined the loaves are not worth $3. These loaves of bread won’t sell unless the price is reduced to overcome the consumer’s objections.
The baker brings out a just-out-of-the-oven fresh loaf of bread. The 30 waiting buyers pass the day-old offerings and fight over the new loaf. The loaf is priced at $3. Because there are 30 people who want it, the baker pulls the loaf onto his side of the counter and says he will sell to the highest bidder. Some bid $4 or $5. Some have to leave the store because they only brought $3. Some are angry and feel it’s unfair to have to pay more than the sticker price. One person bids $10 and the remaining crowd leaves thinking the $10 bidder is foolish. The “value” of the bread is shown on the price tag and its only “appraised at” $3. But is it? Everyone is mad at the baker for being greedy. But is he? The $10 Buyer goes home with the fresh loaf. The baker pockets his $7 profit.
This is how appraisals work: An appraisal is a document ordered by the bank or mortgage provider to give the lender some assurance that the home is worth, at minimum, the mortgage they are prepared to provide. That’s it. Beyond the day of closing that piece of paper is virtually worthless. A Buyer in a Seller’s market must understand, grasp completely and “buy into” the understanding that appraisals are not concrete values. They are the opinion of one licensed professional on one day. If I were to have ten licensed appraisers go to a home on the same day to tell me it’s value, I would likely get ten different values. The values will likely be close, but different. When demand for a home is so high that someone has the funds and willingness to pay significantly over appraised value, the unwilling or unable consumers are going to lose. Every time. So, is the value only $3 if someone is willing to pay $10? Is the Seller “greedy?” They simply accepted the offer of a willing Buyer.
The Central Ohio purchase contract provides a protective contingency to the Buyer: if the home does not appraise at or above the contracted purchase price, the Buyer is not required to purchase the property. Neither is the Seller required to sell it for less than what the Buyer offered. When there are multiple offers on a property it is common for a Buyer to put in writing that they voluntarily waive this contingency and will pay the offered price no matter what the home appraises for. Or they may limit that overage by saying “Buyer agrees to pay $5000 over appraised value, not to exceed a purchase price of $__________.”
In real numbers: You find a house you love for $300,000. You have loan terms agreed upon with your lender that you are putting down 5% of the offered price on the home you buy. On a $300,000 home, you must bring $15,000 to closing as your down payment. You really love this home and offer $310,000 and waive the contingency that the home must appraise. If the home only appraises for $300,000 you must bring $15,000 as your agreed upon down payment AND an additional $10,000 to cover your offered price. The lender will not “mortgage” any more than what the home appraised for.
Why would a Buyer do this? Because when a home is a new listing it is likely the only way to “win” the competitive bid battle. What are your options if you don’t want to pay over appraised value? You’ll notice I’ve addressed these bid battles under the umbrella of “new” listings. Let’s go back to the five unsold loaves of bread on the shelf. If you find a home that has been on the market 10+ days, it likely means the home is overpriced and the Seller has put their home back into a “Buyer’s Market.” All of the negotiating options are in your hands, including limiting your price liability to appraised value.
If it is a new listing (7 days or less) a buyer has virtually no chance of “winning” the bidding war unless they have and are willing to offer cash above appraised value.
This blog is written by Kathy Chiero. Kathy is the Team Lead for The Kathy Chiero Group of Keller Williams Greater Columbus Realtors. Thinking of Buying or Selling? Find us www.OurOhioHome.com © 2021 All rights reserved.