By Johanna Wiseman
“A Seller’s Market” evokes images of crowded open houses, multiple offers, and escalating sale prices.
With many interested buyers ready and willing to sign an offer to purchase a home, it’s easy to see why a seller would expect a smooth and lucrative outcome. A good real estate agent helps the seller examine offers, to choose the one with the best price, perhaps, but also the best terms and qualifications. The eventual selling price is not the only important factor, because there are still hurdles to be cleared once an offer is chosen.
Read more ‘Real Estate’ articles via this link: https://theconnectionsnj.com/category/real-estate-corner/
Primarily, the buyer has to be financially secure. When a buyer applies for a mortgage, the lender will require an independent appraisal. In a climate of rapidly increasing prices, the incidence of under-appraisal is becoming more common. For example, a home is listed for sale at $400,000. An exuberant buyer wins a bidding war by promising to pay $425,000, but the appraiser’s subsequent report values the home at $400,000. This buyer has diligently saved a 20% down-payment ($85,000), plus extra for closing costs. When the lender receives the appraisal report and limits its loan to 80% of $400k, the buyer’s 20% down-payment would technically be reduced to $80,000, but the buyer is required to come up with the difference between appraised value and sale price, an additional $25,000. When added together, the buyer must have the savings and liquidity to surrender a total of $105,000, plus closing costs. If they don’t have the money, they will ask the seller to renegotiate the sale price. Naturally, the seller expects to realize the full amount of the sale price initially accepted. If the buyer and seller aren’t able to renegotiate the sale price to complete the sale, the contract will be canceled. The agent can reach out to previous bidders to see if they are still interested, or reactivate the home for sale. It may not be difficult to find another eager buyer, but time is lost in the process of starting over. We all know: time is money!
You can see why the highest offer is not necessarily the best offer. Looking carefully at the financial structure of an offer, not only the final figure, prevents wasted time and effort. A cash buyer, or a buyer with substantial additional funds in reserve, might avoid appraisal difficulties by waiving the appraisal in their initial offer. As an alternative, an appraisal compromise can be negotiated in advance, capping a potential shortfall at a mutually-agreeable figure. When a purchase offer indicates cash financing, proof of funds is required.
We are at a unique moment in time. Prices are high, yes, and it’s a challenge for regular folks with limited savings to structure a successful plan to purchase a home. Even buyers with lots of cash are concerned about paying what may be an all-time premium for the privilege of purchasing a home. Due to intimidating prices and stringent financial requirements, the “American Dream” of owning a home is more difficult to achieve now than in previous decades. This too shall pass. Seller’s markets end, necessitating navigational changes to the business of buying and selling homes. We’ll all adjust, evolve, and move forward.
Johanna Wiseman, local expert with RE/MAX Preferred Professionals, can be reached at 908-705-0652 or www.johannawiseman.com 