Many Buyers are bidding over asking price in the current Seller’s market. While this can seem daunting, there can be an over-asking strategy in place that justifies paying more than the list price. When you consider appreciation rates, you can determine how long it will take to gain back the return on the over-asking amount. The appreciation rate is the rate at which an asset grows in value.
Surging market prices are showing high appreciation rates since just one year ago. Once you compare recent sales with historical sales in a specific neighborhood, you can gather a general range of the appreciation rate. Even a modest 5% appreciation rate can be seen in neighborhoods like Haiku Town Acres since one year ago.
Request a lender to show how soon you can expect a return on your home purchase. Once you know how long it will take to gain back the difference between the ask price and the offer price, you can decide if submitting an overpriced offer is worth securing the purchase in a market where prices and interest rates continue to increase.
Also consider if it is worth waiting several months, price, and interest rate increases later. By then, you could have already been in an advantageous equity position had you bought sooner.
Financing Buyers Should Be Aware of the Appraisal Gap
Since many appraisal values cannot keep up with the surging real estate market prices, it is common for property appraisal values to come in substantially lower than the offer price. The appraisal gap requires over-ask buyers to cover the gap in price with cash or use appraisal gap insurance, a tool that can be implemented as part of your mortgage insurance.
According to Gary Rosenberg, seasoned Mortgage Broker with Ohana First Mortgage, the recent trend of appraisal gap clauses has resulted in Buyers having to increase their down payments to 30% – 35% to cover the difference between the low appraisal value and the purchase price in order to close.
The Appraisal Gap Clause
To offset the risk of low appraisals, it is common for Sellers to require an Appraisal Gap Clause before accepting an offer that is contingent on financing. An example of this clause in a purchase contract could state “In the event the property does not appraise for the full amount of the sales price, Buyer agrees to increase the amount of Buyer’s down payment as required to close this transaction.” The risk to cover the difference is placed 100% on the Buyer.
What does this mean for today’s Buyer?
Appraisal gap clauses demand higher down payments. Buyers should be prepared with a 30% down payment to cover an appraisal gap clause to make a financing offer as competitive as possible amongst the prevalent multiple offer situations. I recommend financing buyers ask their lender about appraisal gap insurance since this can help those that can afford monthly payments but might not have the cash funds available to cover the appraisal gap.
Do you need help creating a competitive offer? Contact me so I can ensure you are positioned to submit the strongest offer possible for your unique financial situation.