There are 4 Alternatives for Buyer and Seller
What happens if a buyer’s home-value appraisal is less than the purchase price?
If the buyer’s offer to purchase is contingent on the home appraising for the full purchase price, which is the most common scenario on financed purchases, then the buyer and seller have more negotiating ahead.
A bank requires an independent appraisal to confirm a home’s value before it will approve a mortgage. Loan programs have maximum loan amounts, based on a percentage of a property’s total value. Conventional programs range from 5 percent down to 20 percent down. The Federal Housing Authority (FHA) program requires only 3.5 percent down. The Veterans Administration program can be as low as zero down.
For a $100,000 home sale, a buyer who made an offer to purchase with 20 percent down applies for a mortgage for $80,000. If the appraisal comes in at $95,000, the loan amount would max out at $76,000 (80 percent of $95k). That leaves $4,000 to be negotiated.
Depending on current market conditions, the most common solutions will vary.
There are four basic options if a home buyer’s appraisal comes in low:
1. Seller Reduces Sales Price: This is the most common solution in a buyer’s market or a balanced market. The buyer will be less likely to pay more than “market value” for a home, unless there are overriding reasons the buyer wants the property. If the seller doesn’t have backup offers, they may simply want to close the deal.
2. Buyer Increases Down Payment: In a hot seller’s market, buyers line up to purchase. Prices often increase faster than appraisals. And buyers are more willing to pay the difference if the appraisal comes in low, knowing that they will make up the equity as values continue to increase. In some situations, buyers even agree to forego appraisal contingencies up front, to get the accepted offer.
3. Meet in the Middle: Buyer and Seller will sometimes split the difference. The seller will reduce the price and the buyer will increase their down payment. And some contracts may add wrinkles to the negotiation. What if the seller agreed to pay some or all of the buyer’s closing costs? If the appraisal later comes in low, the seller may agree to lower the price as long as the buyer agrees to pay their own closing costs.
4. Cancellation: If options 1, 2 and 3 won’t work, the buyer can cancel the purchase, retrieve their earnest money deposit, and move on to another property. The seller can then look for a new buyer.
The seller and buyer may also agree to order a second appraisal of the property, though if the buyer is using the FHA program, the first appraisal will be connected to the property for three to six months, regardless of the buyer.
The buyer and seller can also dispute the appraisal and even provide comparable properties to back up their argument that the home has a higher value than the original appraisal.
Whether you are a buyer or seller, you should have this “what if” conversation with your agent before you even get started. If your agent isn’t bringing it up, ask them yourself. Depending upon market conditions, you may want to address the issue in the purchase contract.
Thinking about buying or selling a home? Want to discuss today’s best strategies? Call us today at 951-778-9700 or use the form below to request a 10-minute consultation.
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What Happens if Buyer’s Home Appraisal is Lower Than Price | Buying a Home in Riverside CA | Selling a Home in Riverside CA | Brian Bean and Tim Hardin