The time has come, you’ve listed your home for sale and you received multiple offers. YAY! After reviewing the offers and going over all the data/options with your local real estate agent, you’ve accepted an offer and you’re in escrow. Most likely the contract will contain 3 contingencies including an appraisal contingency, a loan contingency and an investigation contingency. There are several things that can happen that will affect each contingency, in this blog, I’ll review the options that the buyer and seller have if the appraisal comes in low.
The basics
An appraisal is ordered by the buyer’s lender. Basically, the appraiser usually reviews recent sold properties that are in the same area as your home and after looking at your home and noting the condition, improvements and any particularly special amenities, the appraiser will come up with a value of your home.
The loan
The buyer’s loan is based on the appraised value. So, if the buyer offers $500,000, the appraisal needs to be at least $500,000 for the buyer to get their loan. The buyer will have been pre-approved for a loan with a certain specified down payment – 3.5% (FHA), 5%, 10%, 20% or more if they choose and are able. If a buyer is pre-approved for a loan for $500,000 with a down payment of 10%, this means they are getting a loan for $450,000 and paying $50,000 cash at closing.
Low appraisal
The lender and the buyer get the appraisal back and it’s lower than the offer price, so now, the lender will only loan on that amount. Let’s go with the $500,000 offer price with a 10% down payment, but the appraisal comes in at $490,000. Now, the lender will only lend 90% of that value to the borrower = $441,000. This means, to keep the offer price as it was at $500,000, $59,000 cash needs to be brought to the table at closing.
Options
The buyer now has 4 options:
1. 1. Pay the extra $9,000 in cash out of pocket at closing
2. 2. Ask you, the seller, to reduce the price of the home. This is all negotiable, you could be asked to reduce the price by $9,000 or below. The buyer may be willing to pay an extra $4,500, if you’ll reduce the price by the remaining $4,500.
3. 3. Order another appraisal – if the buyer and their real estate agent truly believe the appraisal was lower than it should have been, they can order, at the buyers expense a second appraisal. I haven’t heard of second appraisals coming in higher, but it’s an option.
4. 4. Cancel the contract – if you and the buyer cannot come to an agreement as far as reducing the price/increasing the down payment; the buyer can cancel the contract.
There is much more to consider in all aspects of a real estate contract and accepting an offer when you you’re selling a home, even in regards to the appraisal. In a future blog, I will write about ensuring one gets the best chance having an appraisal come in at asking price or how to avoid any issues even if you do get a low appraisal.
In the meantime, feel free to call or email me if you would like to hear more details about appraisals or anything else real estate related.
I aim to be your Top Bay Area Real Estate agent by working diligently, communicating efficiently and creating a win-win outcome for all involved while achieving your Real Estate goals.
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Maya Willner
Keller Williams Realty
100 Pringle Ave Suite 100
Walnut Creek, CA 94706
BRE #01913076
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