Whoa. Appraisers have been criticized for saying homes are worth more than they really are, but this is the first time I’ve read where they are being criticized for saying homes aren’t worth what they are being sold for. Fear this situation – the seller wants to sell you a home at a certain price, you (the buyer) wants to buy the home at that price, and your real estate agent (obviously) wants you to buy the home at that price…but the bank won’t give you the money. Tough situation. The possible solutions aren’t pretty.
By William Neuman, New York Times
As real estate prices have soared in recent months, some buyers have found that the apartments they’ve agreed to purchase were appraised for less than the sale price – with often knotty consequences.
Sometimes, the collision of inflated prices and deflated expectations so unnerves buyers that they look for ways to get out of a deal. Other times, they still want to go ahead but are forced to find more cash or more creative financing, because a low appraisal means they can’t borrow as much in the form of a traditional mortgage.
A bank that is financing a home purchase uses an appraisal to make sure the price being paid reflects the market value of the property, so that it could recoup its capital if the borrower defaults. In setting a value for a property, appraisers rely primarily on data from comparable closed sales, known as "comps."
But in areas where prices have been rising rapidly, closed sales may represent an outdated snapshot of a market, taken several months earlier when prices may have been significantly lower. According to a market report prepared by Halstead Property, the average price for all Manhattan apartment sales that closed in April was 17 percent higher than the average for December. In many parts of the city, prices have climbed even more rapidly, and, especially in those areas, the prices on contracts being signed today can be expected to be significantly higher than recent closings.
Complete article: When the Numbers Don’t Match