Home appraisals are intended to help a lender make a reasonable choice in offering a mortgage loan. After all, if they offer a mortgage loan for a certain amount, but the home wouldn’t resell reliably for at least that much, they are at risk.
During a runaway Northeast Ohio seller’s market, with bidding wars and above-asking offers on the table, one of the concerns that emerges is that an appraisal will come in low on an Ohio home sale. If this happens, buyers have a few options, but none are particularly fun: they can walk away from the deal, pay the difference between the appraisal and the price in cash, or request a change in the price from the seller. In all these cases, they take on some of the same risks the lender is trying to avoid, since they may end up owing more on their home than they could sell it for.
So how often does this happen, and what should you know about home appraisals when the Ohio market is very competitive with very low inventory?
Understanding an Uptick in Low Home Appraisals
While historically a low home appraisal wasn’t common, with Quicken Loans estimating it at 8% of appraisals, it isn’t a concern for most Cleveland homes on the market. However, 2021 was an unusual year in many ways, and low home appraisals surged: this year, CoreLogic saw 20% of appraisals come in low.
It’s easy to see where these potentially-artificially-high home prices came from. First, a pandemic created good reasons to move for a much larger than average amount of people. Then, cutting interest rates to historic lows made it possible for those buyers to shop at a wider range of price points, and further drove demand. At the same time, the Ohio housing market didn’t have the inventory it needed: there were plenty of reluctant sellers, but we also continued to see the impact of stagnant home construction following the Great Recession, which simply means that the stock of available homes wasn’t high.
All of this added up to buyers who, when they found the right Northeast Ohio house, pounced on it. With strong agents who wanted to help their buyers win a contract, above-asking offers came in and were accepted by sellers, even if they knew that the buyers were overpaying with those offers.
Cash offers were king in 2021 particularly because a home appraisal could end a deal if the buyers couldn’t pay the difference between the appraisal and the price.
Low Home Appraisals Going Forward
Because many areas are seeing the seller’s market soften, the percentage of Ohio homes getting above-asking offers and bidding wars is going down. This is a good thing for buyers, because they are less likely to drive the prices up high enough to prompt a low appraisal. It’s also a good thing for sellers, who really don’t want a super-high offer only to have it fall through after weeks of back-and-forth.
Ideally, the numbers will lower again, and with more and more sophisticated free home appraisal tools online, the options have never been better for accurately pricing a home based on comparative properties.