How much home can you afford in our current real estate market?
Without a doubt, the topic of home affordability is popular these days. Whether you’re a first-time homebuyer or a seasoned investor, 99% of us want financial guidance when it comes time to purchase a home.
Assuming you’re using a loan, lenders will talk about the four core components of underwriting: credit, capacity, collateral, and capital. That’s all complicated enough, but in today’s market, you’ll also need to consider something that requires a bit more of a “boots on the ground” understanding of your local market: market value versus appraised value. No matter your price point, those affect everyone in a seller’s market as strong as this one.
So first, what is market value? A home’s market value is whatever you and your fellow buying competition think it’s worth. I know that sounds vague, and it is. Many of the amenities that you want in a home are the same ones that your competition desires; that’s called amenity overlap. However, there will be elements that are more unique to your situation that can differentiate you from others.
For example, you may need a bedroom with a three-quarter bath on the main floor for your aging parents who just can’t handle the stairs, while others might be more concerned with a preferred school district. For both you and your competition, you might share core elements like bed and bathroom count, yet your motivations could be completely different. Your unique factors determine your motivation for each home and, therefore, what that home’s value is to you.
On the other hand, a home’s appraised value is your lender’s attempt to answer a simple question: Is what you’re paying reasonable? The appraised value is determined by an appraisal report, which is written by a licensed appraiser. Appraisers are hired by your lender at your expense to protect the lender’s interests.
So how do the differences between these two types of value affect you in this market? Well, bidding wars are by no means whatsoever an exception—they’re pretty much the rule at the moment. In all price points, the purchase price it takes to win a bidding war and what the lender is willing to loan you aren’t always in alignment.
In previous, more balanced markets, if the home appraised low, you could negotiate with the seller on how to handle it. However, in our current market, often the minimum ante to have a seat at the negotiating table means that you have no protections in the case of a low appraisal. You’re on the hook to bridge whatever gap there is between the purchase price and the appraised value. Keep in mind that bridging that gap is in addition to your down payment and closing costs. Make sure that when your broker is advising you on what price and terms it will take to be the winner of that bidding war, they give you an assessment of what they think the appraised value will be so that you have an idea of what you’re walking into if the appraisal goes south.
To hear my full market analysis, watch my in-depth video here. If you have questions about real estate in general, feel free to give me a call, send an email, or visit my website to schedule a 15-minute call with me. I’d love to help you.
