VA LOAN CAPTAIN BLOG & Learning Center

When Prices Rise Too Quickly

By: Grant Moon 04/13/15 10:56 am

There are areas in the country right now that are experiencing a rather healthy real estate market. This is quite a switch compared to just a few years ago but as usual, real estate values ultimately rebound. Some areas they rebound so high so fast the market has some difficulty adjusting to how fast homes sell. In places where the inventory of homes for sale is on the low side, buyers can bid the prices higher. Sometimes even higher than the original list price. And this can sometimes be a problem for both the buyer as well as seller. How so?
When a sales contract is signed by both parties and a price agreed upon, the contract is then forwarded to the buyer’s lender who then orders an appraisal. The appraisal is used to support the sales price of the property, making sure the lender’s collateral is worth what the sales contract says it is. Many times when there are appraisal issues it’s because the appraised value comes in too low and either the buyer has to come to the closing table with more money or the seller drops the price. Or, the deal is cancelled altogether.
Yet when property values are rising rapidly, that can be a problem, too. An appraiser establishes value by reviewing recent sales in the area. In pockets where home values are booming, recent sales will be lower than the subject property. The appraisal can come in too low simply because there is no current data supporting the rising prices. Yes, the appraiser can make a note in the appraisal revealing the white-hot market but if there are no supporting comparable sales, the value will come in lower. Not because the area is declining in value but just the opposite.

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