The appraisal is one of the most important pieces in the course of a traditional real estate transaction. Basically, an appraisal is the process of estimating the market value of a home using a qualified professional. This step in the transaction is integral, as it will set the limit as to what the lender will loan out to the buyer. This helps to mitigate the risk for the lender by ensuring that they do not loan out any more than necessary.
For example: Bobby Buyer has a purchase contract for Susie Seller’s house for $500,000. If the appraisal comes in at $490,000, then the lender will not agree to a loan totaling any more than that. This leaves a difference of $10,000. Uh-oh.
You can see, though, that this example creates a hurdle – what happens to the $10,000 difference? The lender won’t pay that.
Here’s the bottom line: someone needs to make up that difference in order for the transaction to pull through. Suddenly, you’re back to negotiating.
Here are some solutions to this problem.
One: The buyer can make up the difference
If the buyer happens to have the cash and really wants the house, they can make up the difference between the appraised value and the purchase contract.
Two: The seller can make up the difference
The seller can reduce the purchase price to the appraised value. That way, the buyer does not come out of pocket and the deal can move forward.
Three: The buyer and seller can split the difference
This solution to a low appraisal is a mixture of option one and two. Basically, the buyer agrees to come out of pocket and the seller agrees to come down on price to make up the difference together.
Four: The buyer can walk away
If none of the first three options work, the buyer may have no choice but to walk away from the deal. It is important to remember that there is a financing contingency in the original purchase contract which covers this exact scenario:
“If the Premises fail to appraise for the purchase price in any appraisal required by lender, Buyer has five (5) days after notice of the appraised value to cancel this Contract and receive a refund of the Earnest Money” *Lines 108-109
There is not any sort of penalty for this to either party if they can’t come to an agreement and the buyer would be refunded their earnest money.
A short appraisal can be surprising and stressful to everyone involved in the transaction. However, there are multiple solutions which can get everyone over the hurdle.
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