"Hey Julie, I just wanted to warn you that some of our appraisals are falling short," Alison said. "With each subsequent sale setting a new bar, we're having a hard time justifying the price in many cases."
No kidding . . . given the speed with which homes trade and the WHOPPING prices many properties are selling for, that doesn't exactly surprise me.
However, it might surprise you.
Let me preface my remarks by saying that Alison Teeman is one of the most experienced and knowledgeable Real Estate Appraisers in the Bay Area, having appraised literally thousands of homes in her long and well-respected career. When we need a steady, rational, neutral third-party professional to set a value on a house, whether it's a sale, divorce, relocation, death, or inheritance, Alison is the person we turn to. Hands down, she's the gold standard.
"So how high did that house go and how many offers were presented?" (Too high and 19!)
For those of you who fail to understand why one person's opinion is soooo vitally important, especially if you have waived your appraisal contingency (and nearly every winning offer in the Bay Area has removed both the appraisal and loan conditions), let me explain that just because YOU'VE decided to go all in, it doesn't automatically follow that the LENDER will join you at the table.
In other words, if you are borrowing 80% LTV (that's loan-to-value), the bank is only going to lend you 80% of the appraised value - not 80% of your offer price. Unless you are writing an ALL-CASH offer and risking your money alone, the bank IS going to require an appraisal just the same. On JUMBO loans, they'll often require two, which is why the transaction is infinitely easier when the appraisal and the offer price align.
When the appraisal falls short, that's known as "the delta" and it now becomes the Buyers' shortfall to pay, whether it's a little or a LOT. So if your winning bid was $1 million, but the appraisal comes in at $950,000, there will be a $50,000 gap to absorb. (Hint: the bank isn't going to absorb it.)
If you're off by a few thousand dollars, so be it, but when you've overshot the appraised value by several hundred thousand dollars, the "delta" will be significant (and stomach-churning).
As an extreme example, Sarah and I once represented Sellers who received a preemptive contingency-free offer for nearly a million dollars above the list price. Naturally, the Sellers were thrilled and accepted the aggressive offer on the spot. However, when the appraisal came in a week later, it was short $500,000, which required some come-to-Jesus negotiating to cross the finish line, not to mention a fair amount of goodwill. (Cooler heads and good intentions will always prevail.)
Which is why it's important to understand "market value" vs. "appraised values" when shopping for a home.
The "market value" of a house is set by supply & demand, meaning the sky's the limit. "Market value" is determined by what a qualified Buyer is willing to pay for a property at a given point in time, and it often has as much to do with OUTSIDE forces (job transfer, baby on board, new school semester, etc.), as with the style or condition of the house itself. The higher the number of Buyers, the greater the frenzy, and the steeper the climb . . . .
The "appraised value," on the other hand, is the value a licensed appraiser will assign the house based on nearby "like-kind" sales. The appraiser isn't taking a blind stab at what they think the house is worth; they already know the contractural price before their visit - BUT they must still base their opinion of "value" on the intrinsic characteristics of the subject property and surrounding neighborhood; i.e. bedroom/bathroom count, condition, location, upgrades, etc. - no matter how much you paid for the home.
Therein lies the potential conflict: "market values" are highly subjective, while "appraised values" are decidedly objective (they're also void of emotion), which is why they can disagree.
Consequently, when we write for Buyers in a heated marketplace (such as this one), it's critical to understand the value distinction BEFORE submitting an offer. If you know the risks going in, it's your hand to play. If not, a bad draw can break the bank.
Listen, at the end of the day, you may raise the stakes as much as you dare to secure the property, and win the round. In fact, most Agents will encourage Buyers to go ALL IN, knowing how laborious the house-hunting process can be. Just make sure that if you're laying down heavy bets, you've got a buffer (or two) set aside should the appraisal come up short. If not, it's going to be a much tougher road to navigate.
How can we help you?
Julie Gardner, has been writing The Perspective for 15 years and has published more than 600 essays. She is also a frequent contributor to the Sound Off column in the Real Estate section of The San Francisco Chronicle.