What Buyers and Sellers Need To Know About the Appraisal Gap

With home prices appreciating so rapidly, we're seeing a big gap between the appraised value of the property and what buyers today are willing to pay. Here's what you need to know about this appraisal gap.

It's economics 101, with supply low and demand high, that's gonna drive up prices. So what we've been seeing in this market since basically the middle of last year, when all the lockdowns ended, was that buyers are rushing to buy properties, it's greatly increasing the price, but the appraisals just are not keeping up with where buyers today are willing to pay.

So what does that mean? If you're a buyer and you say, I'll give you $300,000 for this house, but then you're getting a mortgage, the mortgage company is going to require an appraisal, which is a third party company to come out and give their opinion of the value of the property. What the appraiser does, is they're gonna look back in that neighborhood for specific properties very similar to the one that you're buying, and they're gonna look back in the last three to six months because prices are rising so rapidly, those costs that sold three, six months ago are likely not able to keep pace with what buyers today are willing to pay. So appraisers can make some adjustments for time and market conditions. But overall, what we've been seeing, is appraisals coming in slightly less than what the asking price is, or what buyers are willing to pay for the property in today's market.

CoreLogic, which is a major company that tracks the housing market saw that in may of 2021, almost 20% of all properties that were being sold on the market had a gap in the appraisal. So the purchase price, the buyer was willing to pay was more than what the appraised value of the property was. So what does this mean for you? If you're a buyer in this market, you really have to be ready, willing, and able to spend a little bit more money than what the property is, quote, unquote, worth on paper, to be competitive in this market, which you gotta be careful of is overpaying for a property that you may need to sell in one to two years. If you're gonna be in the property for five plus years, the property is going to appreciate enough where you're gonna make up that difference in the appraised value, and it's going to be okay. But, if you think you might outgrow the property, or if you might need to sell, in two years or less, it's probably not the right time for you to be buying the property.

What does this mean if you're a seller? Well, someone's willing to give you $120 for your $100 bill. This is a great time to be a seller, properties are selling for more than what their, quote unquote worth on paper, it doesn't mean you can ask whatever price you want for your house, you still have to be competitive 'cause there's only so much that buyers are really willing to pay above the appraised value. But typically we're seeing somewhere around 3% higher than what the recent gaps were, is what buyers are willing to pay. And this is what's been driving the price of properties up here in South Florida.

So it's a great time to be a seller, it's a great time to be a buyer with low interest rates you just gotta be ready to write competitive offers. If you're gonna be in the property for a long time, you're gonna be just fine. You'll ride out any potential waves and price. Prices go up, they go down, but on the whole, they've been on a steady climb up. So if you're looking to buy or sell a property here in South Florida, give us a call, shoot us a text, send us an email, we'd love to be your guide here in South Florida.