Appraisal doesn't support the Value

Whenever a property reaches a new high the buyer will most likely end up getting an appraisal whose value is less than the purchase price. This doesn't necessarily mean the buyer is overpaying, it does mean based on recent closed sales he's paying more than anyone else before him.

An appraiser in determining value has to base their estimates based on closed transactions. If prices are rising, it becomes harder to bring in the purchase price the buyer has stated in the contract.

The bank always limits the total loans on the property to the lower of appraised value or purchase price. So if you were buying for $1,000,000 and the appraisal came in at $975,000. The buyer would have to pay the difference - $25,000 in addition to their planned down payment and closing costs.

However if this result was unanticipated (which it never should be), than the buyer may choose to renegotiate or drop the contract (assuming the appraisal contingency is still in place).

This sort of situation was more prevalent when the market was crazy in 2003-2005. However I experienced this issue on 2 properties I bid on this week. So contrary to what the papers are saying, the market is strong in desirable communities. Additionally every property I bid on this week has been experiencing multiple bids.

Based on my experiencing in bidding this week as well as talking to fellow agents experiences it's a seller's market again in communities like North Beach in SF, San Carlos, Claremont District in Berkeley, and Mission School District in Fremont. A studio in SF that was purchased last year for $409,000 went pending yesterday, after receiving 12 offers, 6 of which were over the $439K asking price. It'll close in 21 days and was sold as is with no contingencies. The buyer, my guess, is most likely buying it as a pied-a-terre. The appraiser I checked with on this unit said he could support a value no more than $440K. So the buyer is prepared to pay cash over the appraised price.

In desirable communities buyers once again, have are having to make quick decisions. This process is much easier for experienced buyers, but for time bidders have to lose a few to understand what it takes to win.

However it's still a buyer's market in the suburban communities where school API scores are in the 700 or less range. In these neighborhoods buyers can still take their time in deciding to purchase and can negotiate on the price.

Good luck on your house hunting.