Should I Purchase The House When The Appraisal Value is Underestimated ?
Recently many customers offered higher prices and won however, the bank appraises the value too low and has difficulties estimating the price for sale. The differentiation is usually between three to five thousand dollars and can sometimes be as high as fifty thousand dollars. Although the buyers would love to purchase the house, they feel that they are not buying at a fair price, unsure of value they have been told, and whether they should back out or not for fear of losing their deposit.
Over the last few years, the real estate market has risen tremendously, but that was before 2003. This year’s market continues to increase, but at an unpredictable rate. Why is this happening? Here is an example; the first six months of last year, Chino Hills maintained a steady number 120-140 estates listed each month. This year however, has reduced greatly, down to about 50 estates, only about 40% of the houses are on the market, while the demand remains high. That is why the housing prices have raised even more, even if the estate’s market economy remains the same, it is difficult to estimate the market, therefore some sellers follow the marketing price and quickly sell off their house, and others patiently wait for the highest offer within a short time. Presently, these are the occurrences in the market, and buyers must understand this. Too many buyers are offering high prices, so it is at an advantage for the sellers.
As buyers offer higher prices, estimated prices by banks will have a distinct value difference, because appraisals are based upon previous sold estates. In fact, even pending houses in transaction are not used for consideration. As a result, in this hot market, the value of houses currently for sale will be higher than the previous prices. The houses I’ve sold after September are mostly overpriced.
If you were told of your estimated price as a buyer, you might think you were paying higher than the market price. But keep in mind that if the real estate market stays hot, the estimated price for the next buyer will be based on the previous purchase, and the price will just keep going up. High market demand creates the difficulties to estimate a desired price. But if you only want to buy when you have a desired price then you might want to wait for better buyer’s opportunity. When the real estate market declines, most houses sold might be lower than its real value. However, when you purchase the house with a lower price today, it means you can probably buy it with a cheaper price tomorrow. How can you be comfortable with a market like that?
A smart reader should understand, I’m not trying to encourage you to buy a house at least not at this moment. No matter how you compare and research the market, you can never find the perfect timing. Like I said before, if you already prepared a down payment then you shouldn’t hesitate to purchase the house. However, if you are investing then you should be careful if this is the right timing.
Back to the main topic, when there is a difference in estimation, what should you do? Of course, you may decide to sacrifice the house, but the same problem will occur again. Some people say they don’t mind asking the seller for a lower price, but the current market situation gives little chance. Most sellers raise their asking price when they hear of a new house at a higher price. So if you are hesitating to back out because of a price, it may be difficult to buy a house.
If you make an offer with contingencies, usually you can use your following contingencies to cancel your contract, and have your deposit returned.
If you are unsatisfied with the appraisal value, then you may adjust your price a bit. Normally there are 2 ways to do this:
Increase your down payment; the bank bases prices on the appraisal men. For example, if you purchase a $500,000 home, along with the 80% down payment, the appraised value may only be $480,000. With this, the bank will assume the $480,000 plus the 80% payment and allow only so much. Obviously, this leaves you with a $384,000 payment that you must be prepared for. Therefore, your down payment is your $500,000 - $384,000=$116,000, which is $10,000 higher than your original estimation.
Increase the rate of your mortgage. If you do not have extra money in your pocket to pay for the difference of the payment, you may want to increase your mortgage rate. Similarly, if there is a $500,000 house, and you only have $100,000 prepared, you may increase your mortgage rate from 80%-84%. (You may do this when the appraiser estimates the house to be $480,000.) That way, the bank will grant you $480,000 x 84.6%=$403,200. As a result, your preparation fee of $100,000 will be plenty to help you pay off the house. But you still should consider the fact that your down payment is 20% lower than usual, so you may have to pay the PMI every month.
What I recommend is for you to discuss with your mortgage agent and understand what can be done before the purchasing of your home, so things will not become disorderly.
Homes in the past will stand a better chance now.