Imagine if you will: after months of searching and bidding on multiple properties; you are finally in escrow on the home of your dreams. You were one of three offers but this time they went with you. You feel you have done everything right and have even started to tell your friends about the move.
Then, you get a call: the home does not appraise. You agreed to pay $1,000,000 with a 20% down payment, and the appraisal came in at $950,000. You are $50,000 off. What do you do?
In real estate, an appraisal is an opinion of value done by a state license appraisal professional.
When you purchase real estate using a loan, there is almost always an appraisal. It is a bank requirement. Therefore, most purchase agreements are contingent on an appraisal. Appraisals may be waived as a requirement if there is a substantial down payment. This makes sense because the bank is putting in most of the money. All they know about the property is the price, and what the title report shows.
In most purchase transactions the appraisal comes in “at value”. Let’s face it, the best way to determine the value of a property is to expose it to the market and see what people will pay. However, the bank still needs to get an outside opinion confirming the value, so they hire an appraiser.
The appraiser uses recent sales of comparable properties and adjusts them to justify the value. This can be problematic in a market where prices are increasing because the closed sales are in the past when prices were lower.
Here are five common action scenarios when a home does not appraise:
- The buyer can dispute the value given on the appraisal. All lenders have a process for this. You will need to provide comparable sales and be able to make a good case for a higher value.
- The buyer can try a new lender with a different appraiser or more lenient appraisal requirements.
- The buyer can move forward with the low appraisal. They will need to make the difference in cash, especially if the down payment is 20% or less. For example, the bank will lend 80% or 90% of appraised value. The rest is up to the buyer to make up.
- The buyer can walk on the deal. This is easy, especially if the appraisal is a contingency.
- The buyer can ask the seller to adjust the price to the appraised value.
- The seller agrees.
- The seller disagrees – take it or leave it.
- Both parties can renegotiate.
If both parties renegotiate, some factors that may be considered are:
- Are the parties confident of the value?
- Could the buyer pay the agreed price?
- Does the seller feel confident that they can achieve a higher price?
- How soon does the seller need to sell?
- How bad does the buyer want it?
These factors are from cases collected over the years.
Here at the Mike Dunfee Group, we are more than happy to help you with your questions about appraisals and other real estate topics.
Dunfee Real Estate Services, Inc.
DRE # 02026232