The demand for housing in Bucks and Montgomery counties has skyrocketed this year, as the local economy pushes itself out of the pandemic. For months now, bidding wars among buyers have pushed prices up to unprecedented levels.
“Buyers are ravenous and desperate, which makes for no slowing of the market,” said Alex Shnayder, a real estate attorney and agent with Re/Max in Feasterville.
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But as many buyers are bidding higher than the asking price, some appraisals that help finance these hot market transactions are coming in too low to seal the deal. What’s a buyer to do when the appraisal needed for a mortgage doesn’t come in near the price they’re offering the seller?
It’s a tricky question, Realtors and mortgage brokers agree. And one that can stop a sale in its tracks.
“I’ve had several sales where people overpaid, and then when the appraisal came in, they had to come up with an extra $30- or $40,000,” said Jill Kohler of Net Equity Financial in Langhorne.
Mortgage commitments are based on the appraised value of the home. A lender might not agree to finance a purchase if the money needed to complete the sale is more than the home is worth in the eyes of an experienced appraiser sent out by the mortgage company to check out the property.
For example, if a buyer bids $300,000 for a home, but it only appraises for $280,000, the lender might only agree to lend money to complete a transaction to that amount. The buyer will be left to come up with the extra $20,000 to go to settlement, or lose the home.
“I’ve had a few people cancel the transaction because the appraised value didn’t come in close to the price,” Kohler said.
And home prices are only going up in Bucks and Montgomery counties.
The Long & Foster Market Minute shows that the median home price in Bucks rose from $340,000 last June to $420,000 this year, a 24% percent increase with the average sale price being 101.5 percent of the asking price. And the inventory of homes for sale remained low at 763 in June, though it rose 13% from May’s 673 homes available.
In Montgomery, the median sale price was $380,000 ,or 15% higher than the $330,000 median sale price in June 2020. The average sale price was 102.2% higher than the asking price and the number of homes for sale was 1,054, a 10 percent rise over the 962 available in May.
Looking back at the 2020 market:With mortgage rates at historic low, it’s a seller’s market as buyers hunt for homes
The concern about appraisals in a market driven by multiple offers and bidding wars contributed to the Pennsylvania Association of Realtors introducing a new “Appraisal Contingency Addendum to Agreement of Sale” form on July 1 to help move sales along.
The form now provides two options for buyers facing this dilemma.
They can either agree to Option 1, which states that if the appraisal is too low, they will opt out of the deal, or renegotiate it with the seller, or Option 2, that basically means that even if the appraisal is low and they need to come up with other funds, they will proceed with the sale.
“The (new) Option 2 — the point is to allow buyers to signal very strongly to the seller that they want to move forward with the deal one way or the other,” said Hank Lerner, a PAR attorney. This way, the sellers won’t be worried that the buyers’ offer will fall through if the appraisal comes in lower than expected.
PAR President Christopher Raad said that the state organization has been having webinars with Realtors to explain the options so that their buyers know which is the best one they should pursue — “whatever they are most comfortable with.”
Kohler also said that people buying a home must have incomes based on their salaries, not on unemployment compensation. Because of that, and COVID restrictions, many people put off buying a home last year but the market really fired up this year, as workers get their jobs back and could qualify for a mortgage.
In the past month, the inventory of homes for sale has also increased slightly, Long & Foster noted, as sellers who may have hesitated during the pandemic have decided to put their homes on the market since they most likely will get close to or more than their asking price.
Lenders generally will approve a mortgage based on the sale price or appraisal, whichever is lower, but “a lot of first-time buyers don’t have cash on hand if they need it to keep a sale going when the appraisal comes in low and the mortgage company caps the loan amount they will finance. The trade-up buyers will have the cash,” Kohler said, to be more creative in trying to deal with this situation.
Because interest rates are still so low — hovering around 3% for a 30-year fixed rate mortgage — mortgage lenders are also busy with refinancing deals in which appraisals are also involved.
Maureen Fox, an appraiser based in Doylestown, said she knows “people are absolutely bidding over the asking price, but she said she can only go with what the market will bear in making an appraisal. Appraisers base their valuations, among other factors, on comparable homes sold in the last six months.
A mortgage is based on loan to value ratio and the value is the appraised price, not the bid price, Fox explained.
“If the market isn’t there to support the sale price, there’s nothing I can do. I’m hired by the lender, not the borrower,” Fox said, even though lenders include the cost of the appraisal in the mortgage fees to borrowers.
Bob Hawley, a Realtor with Long & Foster in Yardley, said that in most cases, the lender will allow the buyer to put less down in payment to the mortgage company and raise the monthly mortgage payment to make up the difference.
“It’s really not a huge issue,” he said for many buyers.
Neither real estate agents nor buyers like when the appraisal comes in less than the sale price and the buyer has a hard time coming up with the extra funds needed, Fox acknowledged. This is especially true with first-time buyers who may have already used most of their disposable income to make a down payment and pay closing costs.
Shnayder said that every buyer should know what they can really afford to spend in a mortgage payment before putting in an offer on a home.
“Know your plan, your limits and know what Plan B is,” he said, whether that involves receiving a gift of funds for the extra money needed from a relative, or looking for another house that will make the financing of the purchase easier and more affordable.
And if you do sell your current home, since most sellers don’t want to entertain offers from buyers who still must sell their home, know where you will stay temporarily if a deal falls through and you need to look for another home.
“Rentals are tough to come by,” Kohler cautioned, because so many people are trying to make deals now while interest rates are low.
One good thing, Fox said, is that Bucks County has a variety of homes for sale at different prices.
“I’m a big believer (that) location is so important. You can get a lot of nice locations in Bucks County,” she said even if the buyer has to choose a fixer upper or to drive a longer distance to work in order to get a home they can afford.
And, as appraisals are based on homes sold recently in the same community, the value of the property could rise as well, she noted.
Ironically, Fox said she and her husband had to give a seller an extra $30,000 out of pocket to keep their deal going when the appraisal on a vacation home they were buying at the New Jersey shore came in under the price they bid.
Within a couple of months, the prices were matching the price she paid, so she felt she got a good deal. “I don’t regret buying the house for a minute,” she said. “I love it.”
