As an agent primarily focused on helping people build wealth through real estate investing, I am always educating my clients and myself on the state of the market and it’s impacts to the homebuying process. The high rates of appreciation in Phoenix are great for sellers, but also have an impact on the appraisal process. This means that buyers need to be prepared for a very different process, as sellers have different expectations than even a few years ago.

In 2021 about 60% of my appraisals have come in below value, and this is not unique. Listing agents know this and it is causing a couple of ripple effects down the line.

1. Sellers are requiring full appraisal contingency waivers or large appraisal gap clauses in order to consider an offer that uses financing. If the appraisal comes back below purchase price, buyers must come up with the extra cash to cover the gap between purchase price and appraised value. In many cases this is tens of thousands of extra dollars on top of their down payment. Many buyers simply don’t have this kind of extra cash laying around, so while they might be able to afford the payments for a home at a certain price, the risk of a low appraisal prices them out.

2. Sellers are more likely to accept cash offers. Because of the time associated with closing a loan and the difficulty getting appraisals at the purchase price, sellers are increasingly looking for cash offers. Cash offers don’t typically have appraisal contingencies so if two offers are of equal value, one being cash and the other being financed, there is no reason to take the financed offer. Cash offers most often come from investors which further prices out traditional home buyers and reduces the already scant amounts of available inventory.

3. Lastly, buyers need to be prepared for the incredible speed at which they need to make major financial decisions. In a hot market like Phoenix, we are hard pressed to find a median-priced, detached, single family home that survives past the first weekend. This means that traditional buyers who attend an open house or showing on a Friday, Saturday, or Sunday have a couple days max to decide if they want to make an offer and at what price. Additionally, listing agents are prohibited from disclosing exact terms of other offers they have received or expect to receive, so buyers are essentially shooting in the dark when it comes to making an offer. When a buyer asks me “what do you think we should offer?”, I tell them that if you really want this house you need to make your best and final offer up front because that’s what everyone else is doing. In 2021 the asking price is more like the starting bid at an auction and only cash-heavy, decisive buyers are winning.

In summary, we haven’t seen a home buying market like this in years and its my job as an agent to educate clients and set proper expectations. Trying to buy a home in this market is incredibly stressful and can be heartbreaking. I’ve had buyers throw in the towel because they are tired of making offers week in and week out only to lose again and again. We have a saying at Atlas – “bad news fast and first”. If you are a buyer in a hot market with little inventory in 2021 you should know going into your search that you are likely to lose out on several offers, settle for less home than you thought you could buy a year ago, and pay well over asking price. The good news is that you are in a position to buy a home. So don’t give up. Make sure you are working with an experienced agent  and set your expectations accordingly. You’ll be less disappointed when you lose on an offer, and ecstatic when you win.

by Nick Mertens, VP Property Management Sales, Atlas AZ