Local demand, interest rates and even recent history in a specific neighborhood can all influence what property is worth on the real estate market. Sellers try to get the maximum price for their property when listing their homes or investment holdings, while buyers want the most reasonable price for the property that best aligns with their needs.
When demand is high, buyers often make generous offers on homes in ideal neighborhoods or that align with their sense of aesthetics. Those high offers make them stand out from the crowd and often lead to a seller choosing them as the purchaser for the property. However, a generous offer for a property can lead to challenges before reaching the closing table when issues with mortgage-related procedures arise.
Mortgage lenders require appraisals
Extending hundreds of thousands of dollars for an individual to purchase real estate is a major commitment. Lenders can potentially lose a significant portion of the funds that they provide if the buyer defaults on the mortgage and they have to foreclose and reclaim the property.
Especially when there has been damage to the property since the purchase or when the home is not worth the amount owed on the mortgage, the foreclosure process costs quite a bit. Therefore, lenders protect themselves by requiring, among many other safeguards, an appraisal prior to closing.
An appraiser is a real estate professional who has the training to look at the condition of a property and also at comparable properties on the local real estate market to determine what a home is currently worth. The value that they set will have a profound impact on how much the lender will finance. In cases where the appraisal comes in lower than the sale amount, there will be an appraisal gap.
Buyers either need to cover that gap with their own resources or look for alternate solutions, as lenders typically will not finance a purchase if the offered amount is not grounded in the current fair market value of the property. Tracking changes within the local real estate market can help people avoid challenges in a residential real estate transaction by giving them a better idea of how values might change.