What Happens When the Home You're Buying (or Selling) Doesn't Appraise?
By: Sally Grenier, Broker/Owner
Metro Brokers | Grenier Real Estate
With home prices skyrocketing in recent years, we all know it has been a fantastic market for sellers. But we are starting to experience a downside. In recent years I've been hearing more and more stories about homes not APPRAISING for these inflated prices. Personally, I have had several transactions in the last few years where the appraisal came in low. In one case it was a dramatic $25K low!
With such low inventory, and strong buyer demand, it's not uncommon for a new listing to receive multiple offers, and in many cases it ends up going under contract for $5K, $10K, even $20K above list price. As a result, appraisers are having a hard time finding comps that support these higher prices.
So what happens if the home doesn't appraise? The buyer's lender will only approve the loan if the home appraises for the contracted purchase price. If it comes in low, there are four options:
1. Seller can drop the price to the appraised value. Many sellers are reluctant to do this because we are in such a hot sellers market. But the reality is that they could run into an appraisal issue with the next buyer.
2. Buyer can come up with the difference. (i.e. If the house is under contract for $400K, but appraised for $395K, the Buyer will need to kick in $5K). In this competitive market, many buyers are including "appraisal gap" clauses in their offers. They basically write a clause into the contract agreeing to pay the difference between the appraised value and the contracted purchase price. But many buyers are already putting everything they have into the down payment & closing costs, and don't have extra funds to do this.
3. Buyer and Seller (and maybe even agents) can work together where all parties kick in some $$ and arrive at a compromise to keep the deal together.
4. If both parties won't budge, then the contract terminates and Sellers have to start all over again with a new Buyer.
So what can you do to make sure your home appraises?
1. Make sure you have a good agent representing you. Whether you are the buyer or seller, your agent should be actively involved in this part of the transaction. Your agent should be willing to meet with the appraiser at the property, or at the very least call or email him/her and provide pertinent info pertaining to the contract, such as if there were multiple offers.
2. Your agent should provide a current list of comps that support this price. If comps aren't available from the last 6 months, it is possible to pull comps that are older than that, but also provide data showing how values in that area have been increasing.
3. Working with the listing agent, sellers should provide a list of all upgrades or home improvements they've done since they have owned the home. If the house has a new roof, or windows, appliances, these should be pointed out to the appraiser.
Lesson for Sellers:
Just because you got a fantastic price for your house, doesn't necessarily mean it will actually appraise, or sell for that. When reviewing offers, keep in mind that a high purchase price isn't necessarily the best offer. Look at ALL terms of the contract. Make note of any buyers who are willing to offer an "appraisal gap" clause.
Lesson for Buyers:
Just because you offered $20K over list price doesn't necessarily increase your odds of having your offer accepted. Be aware that you may be competing with buyers who are offering to "waive" the appraisal (by offering an "appraisal gap" clause in their offer).
Finally, if you are planning on buying or selling, make sure you are working with an experienced REALTOR who can guide you through this complicated process.
For information about buying or selling, please do not hesitate to contact me!