Hey everyone it’s Austin Solomon with The Solomon Group at Coldwell Banker Action. Coming to you live with this week’s episode.
Today we’re talking about:
- What is an appraisal?
- What happens if it comes back low / or is less than the purchase price?
- How as a buyer / seller you can navigate through a low appraisal?
What is it?
- An appraisal is an estimate of the value of something, in our case a home. They serve two purposes as a buyer, normally it’s a condition to the offer or contingency the lender requires one because when they are borrowing a large amount of money, they want to make sure it’s worth what they’re borrowing (in case one would default on their loan, the bank can still sell the property to recoup their loss)
- It’s used as a protection to the buyer, to make the offer contingent on the appraisal (expert evaluation of the value) being at least the purchase price or above
What if it comes back low?
- If we look at the offer to purchase and the terms of the offer, unmodified (if it’s not modified there are 3 things we can do:
- The buyer can make up the difference
- The seller can drop the price to meet the appraised value
- Or somewhere in between with some negotiating
A buyer makes an offer on a home for $200K. They have the home appraised and the appraisal comes back at $190K.
#1 – they can be ok with it and may think it’s not “idea” but they can make it work and can bring the additional $10K to closing to bridge the gap.
#2 – they can submit a copy of the appraisal and notice to the offer stating the price of the home must come down to the appraisal or the deal is off.
(To which the seller can decide at that point to move forward to the new price or to cancel the deal)
#3 – some form of negotiation or middle ground. Going back to our example the buyer might tell the seller you know what, let’s split the difference and drop the price to $195K and do an amendment to the offer.
These are scenarios that can happen. The reason I’m bringing this up is because with the market the way it is and prices going up very quickly, and buyers competing, sometimes $10K, $20K, or $30K above asking, a buyer and seller need to understand the appraisal and how it works to navigate that process. As a buyer, in cases you need to address the appraisal issue upfront with a seller when making an offer.
What do I mean?
Let’s give an example? A home comes on the market at $184,900. You see the home and you love it, and then you find out that a lot of other buyers love it too, there are 7 offers in on the home and you decide to make an offer at $205K ($20K over asking) but you have an appraisal contingency.
That leaves a big question mark for a seller. These buyers are going $20K over asking but there is an appraisal condition. What if the appraisal comes back at $185K (the asking price). Will the buyers only be willing to pay the $185K? Is this $20K over asking really that good… we don’t know / we won’t know until the appraisal happens, and that’s a big question mark for a seller.
So as a buyer, you might address this question up front and in the offer, outline that in the event the appraisal comes back low and the buyer will pay $10,000 towards an appraisal deficit, if the appraisal comes back low as a buyer, I’ll pay $10K over the appraisal value (not to exceed to the purchase price).
So in our example, asking $184,900, offering $205K and you tell the seller hey I’ll cover at least $10K of the deficit, then if the appraisal comes back at $185K, the seller knows they are at least getting $195K. If the appraisal comes back at $195K then they still get the $205K.
You might say Austin as a buyer, why would I want to do that? Pay $10K over the appraisal value? If there are 7 other offers on the home, and you really want the home, you are going to want to get creative!