It’s economy 101 – when supply is low and demand is high, prices naturally rise. That’s what’s happening in today’s housing market. Home prices are appreciating at near-historic rates, and that’s creating some challenges when it comes to home appraisals.
In recent months, it’s become increasingly common for an appraisal to come in below the contract price on the house. Shawn Telford, Chief Appraiser for CoreLogic, explains it like this:
“Recently, we observed buyers paying prices above listing price and higher than the market data available to appraisers can support. This difference is known as ‘the appraisal gap . . . .’”
Why does an appraisal gap happen?
Basically, with the heightened buyer demand, purchasers are often willing to pay over asking to secure the home of their dreams. If you’ve ever toured a house you’ve fallen in love with, you understand. Once you start to picture yourself and your furniture in the rooms, you want to do everything you can to land the property, including putting in a high offer to try to beat out other would-be buyers.
When the appraiser comes in, they look at things a bit more objectively. Their job is to assess the inherent value of the home, so they’re going to study the facts. Dustin Harris, Appraiser Coach, drives this point home:
“It’s important for everyone to understand that the appraiser’s job in the end is to remain that unbiased third party, to truly tell the client what that home is worth in the current market, regardless of what decisions have been made on the price side of things.”
In simple terms, while homebuyers may be willing to pay more, appraisers are there to assess the market value of the home. Their goal is to make sure the lender isn’t loaning more money than the home is worth. It’s objective, rather than emotional.
In a highly competitive market like today’s, having a discrepancy between the two numbers isn’t unusual. Here’s a look at the increasing rate of appraisal gaps, according to data from CoreLogic (see graph below):
What does this mean for you?
Ultimately, knowledge is power. The best thing you can do is understand an appraisal gap may impact your transaction if you’re buying or selling. If you do encounter an appraisal below your contract price, know that in today’s sellers’ market, the most common approach is for the seller to ask the buyer to make up the difference in price. Buyers, be prepared to bring extra money to the table if you really want the home.
Above all else, lean on your real estate agent. Whether you’re a buyer or seller, your trusted advisor is your ally if you come up against an appraisal gap. We’ll help you understand your options and handle any additional negotiations that need to happen.
Bottom Line
In today’s real estate market, it’s important to stay informed on the latest trends. Let’s connect so you have an ally to help you navigate an appraisal gap to get the best possible outcome.
Becoming financially secure is an important goal for many people today, but some don’t realize just how much homeownership can help them achieve that dream. A recent report, The Journey Toward Financial Freedom, surveys Americans about their perspective on financial wellness and their goals. It shows there may be a significant misconception about the role owning a home plays in building wealth:
“Home ownership is one of the indicators Americans say is least connected to financial health.”
Two major personal wealth goals – homeownership and net worth – work hand-in-hand. Below are just a few reasons why, if you’re looking for financial security, homeownership should be a top priority.
Homeownership Is an Important Cornerstone of Building Wealth
Every three years, the Federal Reserve releases the Survey of Consumer Finances which highlights the difference in wealth between homeowners and renters. The graph below shows the findings across the previous surveys including the latest data (2019), and the results are staggering:As the graph illustrates, the gap between homeowners and renters continues to widen. That’s because homeownership contributes massively to an individual’s overall net worth. Odeta Kushi, Deputy Chief Economist at First American, highlights this idea:
“. . . between 2016 and 2019, housing wealth was the single biggest contributor to the increase in net worth across all income groups . . . .”
When we look even closer at the most recent data from 2019, the average homeowner’s net worth is more than40 times greater than that of the average renter (see graph below):The gap exists in large part because homeowners build equity as their home appreciates in value and they pay off a portion of their mortgage each month. When you own your home, your monthly mortgage payment is, in essence, forced savings that come back to you when you sell your home or refinance. As a renter, you’ll never see a return on the money you pay out in rent every month.
If you’re ready to start building your net worth, the current real estate market offers several opportunities you should consider. For example, with today’s low mortgage rates, your purchasing power may be higher now than it has been in some time. That means there may be no better time than now to start working towards your homeownership goals – especially since rates are anticipated to rise in the coming months.
Bottom Line
Owning a home provides one of the strongest foundations for building individual wealth and lasting financial security. If you’re ready to start your path towards homeownership, let’s connect today.
Albuquerque Real Estate Investing: 4 wealth generators in long term real estate investment
(Transcript Snippet): “Tracy:
So Tego real estate investing. So you did an amazing class this week and you trained on,
Tego:
Did y’all hear that. She said I did an amazing, did you say it was amazing or do you just said I did an amazing hold on. I got, I got to make sure I got that right. Just kidding.
Tracy:
Uh, so you taught a class on real estate investing this week to real tours and it was really great because you talked to them about why they should also be investing. Right? Because we talk about being a resource for our community, as far as, you know, helping people find investment properties, but just kind of went through some things that I thought were really good bullet points and hoping you could recap them.
Tego:
Yeah. See, you know, the thing is when people hear real estate investing, I think maybe at a high level, all they think are about are the late night TV ads that say, get rich flipping houses, right.
Tracy:
Or buy houses with no money down.
Tego:
They think about all these air quote. I use that term too much air quote that the, the, the, the kind of the get rich you know, make lots of money, quit your job, you know, educational programs that are out there to teach people how to invest in real estate. Right?
Tracy:
Yup, yup. Educational. Yeah. So, yeah.
Tego:
So I mean, basically what they’re selling is a, you know, three, four, $5,000 class on how to buy and, you know, buy homes cheap and flip houses. Right. So there’s a lot of that out there.
Tracy:
So when you think about investing people think of flipping or investing,
Tego:
What kind of breaks down into two very broad categories and understand within these two categories, there’s a lot of subsets as well. So you’ve got the, the, the now investing and the tomorrow investing. And so when we’re thinking about now investing in real estate, that’s the flipper, that’s the person that buys a distressed property goes in there, cleans it up, makes it beautiful, resells it,
Tracy:
And now, now makes a profit. Then now, now investing,
Tego:
Investing, right? That’s that’s like a job, right?
Tego:
That’s like money for now
Tego:
Income. Yes. That’s that’s money for now. The other type of investing, which is, which is much larger in, in Eddie knows this world really well, because he was in the commercial world, was the, basically the hold investor, which is more of a you own it, you rent it, you collect rent over a time. But there’s a bunch of other advantages, which I’m going to go into here in a second. So it’s the tomorrow to a certain extent. It’s not like, you know, you’re just making the money now. It’s, it’s your investing in the property in, you’re getting cashflow and you’re getting another, a few other benefits over time. And it’s, it’s more of a long-term investment. So what
Tracy:
Are some of the ways that you make money over time with a long-term investment
Tego:
Long-Term real estate investing basically falls into there. There’s four. What we call wealth generators. So you’ve got your cashflow. Cashflow is very simple. That’s if you own a property, you rent it out, you pay all the bills, you pay your property manager. If you’re doing that, you pay whatever else you’re doing. Taxes, insurance, utilities, repairs, and so on. Right. Whatever’s leftover. Why do you,
Tracy:
That didn’t sound like there was going to be anything left over the way. You
Tracy:
Said that after you pay this and this and this and this whatever’s left over,
Tracy:
I’m like, wow, it doesn’t sound like anything would
Tracy:
There is, usually
Tego:
No. And that’s why, you know, you, you, you can’t just think, oh, it’s rent minus my mortgage payment. No, no, no. You gotta think about all that other stuff too. Yeah. So, but, but cashflow is okay, what’s leftover at the end of the month after you’ve paid all those things, right? So that’s cashflow, that’s one way you’re generating income from a real estate investment. And that, and that to a certain extent is now money. You’re getting that in your pocket, in your bank every month. And that would fall right to a P and L you know, your bottom line of your P and L on your business statement. Well, you’ve got three other things that are, are definitely more of A longterm play. So one of them is price appreciation, you know, over time, no matter what happens over time, historically home prices on real estate go up, it goes up on houses. It goes up on multiunit. It goes up on commercial. It just does. And, you know, even if you bought a home in 2007, you know, at the height of the market, you know, eventually that home would have, you know, even though it fell covered 20 or 30%, it recovered. Right. So that’s one way. So you get appreciation over time. The other, the, the third one is your loan gets paid off over time.
Tracy:
I’m assuming you have a loan. Yeah. Assuming you have a mortgage, right. You’re paying it down. Yup.
Tego:
You’re paying it down over time or even better. Your tenant is paying it down over time. Right. You’re not paying it down. Right. So again, that’s just banking money every month. Right. It’s, it’s, it’s kind of like what we talk about when we’re talking about why you should buy a home is every month you’re paying down your you’re paying down your loan payment, which is forced savings. Right. Right. and then the fourth one, and this, you know, w we could talk about this one for hours and hours and hours, and still scratch the surface. You could,
Tracy:
I couldn’t talk about it for hours and hours and hours
Tego:
And that’s tax savings. There’s a great book that I just finished reading. It’s called tax-free wealth. It’s part of the Robert Kiyosaki series of, of books. It’s written by rich dad, dad, guy. But it’s called, it’s called tax-free wealth. And the one big takeaway for me on that one was the us tax code, which is crazy long, right? It’s, there’s not a whole lot in it. This is what he said. There’s not a whole lot in the tax code about collecting taxes, but there’s a whole lot in it about how to save on taxes or certain things and behaviors that you can do that save you on taxes. And one of those things is buying real,
Tracy:
Right. And what’s interesting about that is people call those things loopholes, but it’s the tax code designed to incentivize incentivize certain behaviors. And they want people to buy properties, right? And they need rental properties for our economy and all the different benefits that come with it.
Tego:
You know, we are in a housing crisis in this country right now. It’s a different kind of housing crisis. And we had, and let’s say 2008, you know, when in 2009, when everybody was going through foreclosure, we have a housing shortage crisis. Right now, we have just like I was talking about earlier, we have, you know, more families, more people wanting homes, more people starting families. We have this huge millennial boom population of people that want homes. And there’s just not enough. There just hasn’t been enough built over the last 13 years. So anyway, back to the whole, again, that the fourth for wealth generators of hold real estate investing, just to summarize it again real quick, it’s the cashflow it’s monthly money. You got leftover. It’s the price appreciation of the property. It’s the loan payment or the loan buy down. If you do have a loan.
Tego:
And then the last one is a tax savings. And I will just want to say something about the loan. I’m a huge proponent. And I think most people that have spent a lot of time researching and understanding real estate investing getting a loan on the property and no what’s his name? Dave Ramsey is not going to like this, but, but loan leveraging against a property getting a loan from a bank, especially when we’re talking three and a half percent, mortgages has some huge advantages. I mean, again, we don’t have time to go into it now, but it’s something that, so
Tracy:
What you’re saying is you’re a big fan of other people’s money, OPM, OPM, other people’s money. So
Tego:
Eddie likes OPM too, but the good, the, the, the, the, the, the real estate leverage type of opener. Right, right. Exactly. Yeah.
The Albuquerque rental market: Is it as hot as its purchase market?
(Transcript Snippet): “
Tracy:
Next topic. Tego. Let’s talk about rentals.
Tego:
Yeah. Let’s talk about rentals and I’m gonna, this is going to, I’ve got two subjects here that kind of talk about rentals and then also the other side of it, the in real estate investing, but let’s talk about the rental market. Um, Tracy, you and I, obviously we own rental properties here, here, here in town and elsewhere. Um, and, and I can just say the rental market for Albuquerque is pretty crazy. It’s, you know, we talk about the resale market and we just had this conversation about home selling for above list price. Well, the, the rental market is just as nutty in many ways.
Tego:
I Should probably turn off my cell phone on the radio.
Tracy:
One of the things you know, that we really want to get to when we talk about rentals, besides that rents have gone up is I just had this conversation this week too, with somebody they called. And they’re not sure if they are going to be able to qualify for a loan for a house that they want. And so they said, you know, I may need to rent. And so I was warning them to be really careful about rental scams, because they’re still out there in full force. Right?
Tego:
Let’s talk about that. But before we do, I want to just say the rental market is extremely tight. Meaning when, when a good rental property comes on the market or in many cases, any rental property comes on the market. There are people out there waiting, and there’s usually a frenzy of people trying to get that property. So not the same as in a sale is like a bidding war, but basically it’s an application where people putting in applications and saying, I’ll pay more deposit or I’ll even pay more rent. We’re seeing some of that because of the fact that people are so desperate to find a property. Unfortunately, the scammers are taking advantage
Tracy:
Of that. They really are.
Tego:
And So tell us some of the common scams out there, if you’re a renter looking for a place to rent things to watch. Sure.
Tracy:
So if the rent seems too low for the property, it probably isn’t a real property manager, um, depends on where you find it. But a lot of those like Craigslist type, um, online,
Tego:
Any, any place that allows somebody to post an advertisement for a property for rent that doesn’t cost that person to post that property should be red flag city beware be very careful. So things like Craigslist, Facebook ads, uh, you know, uh, offer up. I don’t think offer up actually does rentals do they? But anyway, you know what I’m talking about. So it’s any of those type of, you know, online bulletin boards where you can post things for rent. And if, if somebody can literally go in there, create a fake profile, go grab some photos of maybe a homeless listed for sale or a homeless listed for rent posted on there. They can be totally anonymous cause they can just create a fake email address. Right? You just got to understand it’s really not that hard for somebody to create a fake home for rent lists,
Tracy:
Right? So a lot of other red flags, right? So besides maybe a low price, some sort of hardship, why they need to rent it quick, why it’s lower price. They’re just looking for a good family. We had to leave the country or we had to leave. And the house is, you know, available. We just want a good family, why they can’t meet you. But you know, they’ve changed some Tego. Some, some people now will actually meet and give keys. They sometimes we’ve seen where they’ve read Kita house. They take your first month, your last month and you never hear from them again. So be really careful. You know, the multiple listing service allows us to put rentals on there. And I’m not, not that many are on our multiple listing service, but they have to go on by a realtor.
Tego:
What, one of the other, the other red flags just real quick. And then I want to talk about, okay, where, where can people go that are looking for things to rent? Where can they go to find stuff? So, so first off, one of the other red flags, if you go to the house and it has a for sale sign out front, because I, over the years, Tracy, how many times have we had people calling us that, that went up to a house we have listed for sale and said, I was going to rent this. Somebody said this was for rent and or the quote, the air quote owner said, this was for rent. And they drive up and they have our sign out front. Right.
Tracy:
And honestly, Tego, I’ve seen those online for rents. And it says, please ignore the for sale sign out front because the don’t tell them, don’t tell the realtor that I’m also trying to rent it. Yeah. They’re sneaky.
Tego:
Let’s be honest. These are awful people taking advantage of people that are, that are just trying to find a place. Right.
Tracy:
So there are rent to own legitimate rent to own options out there that we’ve talked about before. But let’s talk about rents.
Tego:
Yeah. Let’s talk about where can people go to know that they’re getting a legitimate home for rent and you talked about the, the
Tracy:
MLS, but the other ones you can Google Albuquerque property management and find legitimate property managers here in Albuquerque. We’ve got Maddix, we’ve got sky, we’ve got Tyson, we’ve got AME, all sorts of property managers and just go direct to them, find out. And especially if you don’t know parts of town, they can help orient you to what parts of town. Um, we were not property managers, but we can help facilitate getting you to property managers, but it’s basically that list.
Tego:
So going to the source, going actually to a legitimate property management company, um, you know, there, there are ways that you can interact directly with a property owner and let’s be real. I mean, there’s a lot of small like us, uh, landlords that own a few properties that are, you know, that don’t hire a property management company to take care of the property form. So, you know, you just have to have your, have your spidey sense up, you know, just if it doesn’t sound right, then maybe it isn’t
Tracy:
Right in. So Tego, I have a question for you. If you find it for rent on Zillow or Trulia, do you think it’s possible to be legitimate or not pretty
Tego:
Good chance that those are legitimate? And the reason is Zillow slash Trulia with the same, same company, they actually charge a, I don’t remember, 30, 40, 50 bucks for, uh, somebody to list a rental property for sale. It’s exactly why it’s one of the reasons I shouldn’t say the only reason, but that’s one of the reasons ELO started to charge property owners and landlords was to weed out the, the scammers that were just posting things up there doesn’t mean it. Some scammer wouldn’t be my wine, mine, you know, paying the money to do it. If they think it’s going to pay off, but usually scammers aren’t willing to pay.
Tracy:
So Tega, what’s happened to rental rates in the past year. Well, that’s
Tego:
A great question because you know, we talk about the Albuquerque real estate sale market. We’ve seen anywhere 14, 15, 13% somewhere in there. It’s really hard to tell, but we’ve seen really big price appreciation in home sale prices
Tracy:
Over the past year, over the past year.
Tego:
And that’s annualized, thank you, rent. Same. It’s almost identical. It’s actually maybe even a little more 14, 15%. Every person that I know that owns rentals or the property manager is just everybody is like, I can’t believe what things are renting for today. And of course, anybody looking for a place to rent is probably saying the same thing going, I can’t believe what things are renting for today. Just because the market is very tight. We do have people moving into the city into the, you know, the Metro Albuquerque area that, you know, it’s, it it’s this whole, you know, snowball thing, right? We, we don’t have enough homes for people to buy. They got to live somewhere. So the rental, so it’s driving both. We just have more people than we have places for them to live in the Albuquerque area. And that’s going to drive prices up on both resale and rent. Right. And in my humble opinion, don’t see it slowing down.
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