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Q&A: What happens if my house does not appraise for the contract price?

Who does this affect:   This is a potential issue for both buyers and sellers

Answer:  This is known among Realtors as “appraisal risk” and can come about in a number of ways

  1. The property was priced too high by the seller or listing agent
  2. There were multiple offers that drove the contract price too high
  3. The buyer needed closing cost assistance from the seller and the price was increased to cover those closing costs

However it happens, this is a serious problem.  By the time that you receive an appraisal and know that it has come in under the contract price the buyer will have already paid for the Option Fee, the Inspections and the Appraisal.  Those expenses can easily add up to $1,000 or more.  There are four main ways to handle this situation:

  1. Buyer’s preferred solution: Lower the contract price to the appraised value.  It is easy to see why the buyer would prefer this solution, but in some cases is also makes sense for the seller.  If the appraisal is accurate then the seller is going to have to deal with the same issue with the next buyer if they don’t work it out with the current buyer.
  2. Seller’s preferred solution: Buyer waives the appraisal contingency and agrees to pay cash for the difference.  The buyer’s lender is only going to loan funds based on the lesser of appraised value or contract price, so the buyer will have to pay cash for the difference.  For example:  Contract price is $200,000 with buyer using a 10% down conventional loan. Appraisal comes in at $185,000.  The mortgage lender will only loan $166,500 (90% of $185,000) instead of $180,000 (90% of contract price of $200,000).  Buyer will have to come to closing with an additional $15,000 in cash.
  3. Compromise solution: The buyer and seller agree to a price somewhere between the contract price and the appraised value, and the buyer pays the difference in cash.  The seller can include additional items such as appliances, televisions or window coverings that they don’t need, or the buyer can agree to reduce the closings costs paid by the seller (if any) and lower the price by a proportionate amount.
  4. Least preferred solution (both parties): Buyer terminates the contract under the appraisal contingency and receives a refund of the Earnest Money.  Seller put the property back on the market and tries again with another buyer.

Expert Tip (Sellers):  If you have made any recent improvements  (within 18 months) of any substantial value (new flooring, new counters, new kitchen, new roof, new paint, etc), provide a copy of those receipts to the appraiser.  The appraiser can use those receipts to help justify a higher price.

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