Appraisal gap: What it is and how it affects Albuquerque’s Real Estate market
(Transcript Snippet): “Tracy:
So let’s talk about appraisal gap. We decided, you know, at the top of the show, that’s one of our topics. So we go out and we show buyers houses.
Tego:
Can I just say, I mean, this is kind of a new term, even a lot of us in the real estate industry, because it wasn’t a phenomenon that was really happening that much once in a while, but now it’s much more common in, in the term is appraisal gap. And so what does it mean? It’s
Tracy:
Interesting because in my 19 years in real estate, I’ve never used an appraisal gap until this year. So yeah, it’s, it’s been out there, but it’s not something we are familiar with. Yeah. Appraisal gap. So we take buyers to go look at houses. They know it’s busy. They know there’s competition. A lot of times when we show up to show a house, someone else’s finishing touring the house right before us. Right. And because of COVID and things, we try to give each other space. We let them finish. Before we go look at the house. A lot of times we’re leaving the house and somebody’s waiting to go in, but we go in, we tour the house by your falls in love. They want that house. And they start placing furniture in the rooms. The kids are picking out their bedrooms and they want that house. And so basically the buyers then decide that they’re willing to pay over asking price to be the one selected, to be the stewards and owners of that home.
Tego:
Well, it’s, it’s the auction effect, right? So now, now buyers feel like they need to outbid the other person for this house because there just isn’t any other things, you know, anything else that they want because there’s so few to choose from.
Tracy:
Right? So what they do to make their offer more attractive to the seller is they say, okay, you want 300,000 for your house. I’ll pay you 325,000. And I’ll pay you 25,000 over appraised value up to 3 25 as its appraisal gap. In the event that the house doesn’t appraise for 3 25. So they’re basically saying if it appraises for the 300, they’ll still pay that 25,000 extra out of their own pocket. It can’t go in alone to pay what they agreed to buy the house at. So a buyer can do that. Go ahead. Buyer can do that. And then what happens to you go, they’ve got a loan, they’ve got
Tego:
A loan. So th the, the thing is, it’s like, okay, you’ve got a home. You’ve got, let’s say 20 people that looked at it. You get five offers. They’re all over list, price, upcoming appraiser. Can’t just say, well, obviously the home is worth that much because there’s five people willing to pay more than what it was listed for. How come an appraiser. Can’t just take that into account and appraise it for a higher, higher value.
Tracy:
I think they really want to, and they know that the house is worth it because I’m sorry. Go ahead. But appraisers are looking backwards. They have to use past data to, to a lender, what the house is worth based on past data. So they’re going back several months, a mile radius, further out. If they have to, to get similar properties, to show what they have sold for, to justify what it should be worth right now.
Tego:
Let me, let me just make something. If I may, you may, in 2008, I think it came in, it was the Dodd-Frank act, right. It had to do with, you know, it was basically retooling of the financial system and mortgage, and the way mortgages are done in particular. And one of the things that came in was very tight regulations around how appraisals were done. One of the things that created our, our bubble back in oh seven, eight was kind of drive by appraisals. You know, basically appraisers. I don’t want to blame appraisers because they were following the guidelines that were in place at that time. Right. And it was, they were a little more lenient where, like I said earlier, they, they could just say, well, there was five people that wanted this house say I wanted to pay $250,000. There’s no data that justifies that, but obviously that’s what it’s worth. Cause that’s what willing people are willing to pay. And they would, they would appraise it for that. Well, now the appraisers have guidelines that don’t allow them to do that, which is actually good in the sense that it keeps our market from over-inflating too fast and getting ahead of ourselves.
Tracy:
So it’s important to understand the appraiser’s job in the end is to remain that unbiased third party to tell the client what the home is worth in today’s market, regardless of what decisions have been made on the price side of things. Right? So, so they come in and they might say, you know, it’s, it’s 3 0 5, maybe, right? And the buyer has agreed to pay 3 25 and up to appraisal gap up to 25,000 over. So the buyer is now going to bring an extra $20,000 to closing because we basically pre determined that even if it didn’t appraise, they were going to buy the house. So that’s what an appraisal gap is. Yeah. We got a whole lesson on appraisals on the market. But the appraisal gaps are very common right now. And honestly, Tego, you know what, I’ve seen more than appraisal gaps waiving the appraisal a hundred percent.
Tracy:
So they’re not even saying all the pay 10,000 over appraised value, or I’ll pay 20,000 over appraised value. They’re saying we’re going to buy the house regardless of how much it appraises for. And you know, that could mean they’d have to bring a hundred thousand to closing. We saw a house appraised for a hundred thousand low. Right? Yep. And so and, and when you get a low appraisal, if you’re using a loan, which most people with cash these days aren’t requiring appraisals, the, the amount that you’ve agreed to pay that gap or that waiving the appraisal value is money that be in your loan, right? Yeah. It doesn’t increase your loan amount. You have to actually have that extra amount to bring, to closing. In addition to your down payment and closing costs.