Real Estate Appraisals: What Can Go Wrong
In real estate, there’s never any guarantees.
That rule of thumb applies to real estate appraisals too! In this video we cover some options that both sellers and buyers can consider in the event a real estate appraisal doesn’t appraise for the agreed upon purchase price.
If you’re buying or selling a house, you can expect to have a real estate appraisal be part of the process. Unless, of course, the buyer is paying all cash – then you might not have an appraisal.
You see, if the buyer of a home is going to get a loan, the bank lending them money is going to want to protect their investment. They do that by hiring an unbiased 3rd party to appraise the property. This appraiser is going to do an analysis on the home, compare it to similar sales in recent months and come up with a value.
If the appraisal is the same, or above, the purchase price:
You’re good to go! That means that the appraiser has found the value of the home to match or exceed the amount you agreed to in the purchase agreement. Congrats!
If the appraisal is LESS than the purchase price:
Now you have a problem to deal with. And, there’s various ways you can resolve this problem. I’ve highlighted the most common in this video.
For example, let’s say that you’ve agreed to a price of $1,000,000. But, the appraiser says that the house is only worth $250,000. Yikes!
If you’re the buyer, you could pay out of pocket for the difference. In this case, that’s $750,000!! Probably not the most amazing investment decision.
If you’re the seller, you could discount the sales price to the new appraised value. That’s a discount of $750,000!! Ouch.
Both buyer and seller could meet in the middle. The buyer pays a little more than the appraisal price out of pocket and the seller discounts some, but not all of the difference.
If none of these options work for one or both parties in the transaction, it’s entirely possible the deal could fall apart. (In real estate we call that a BOM – back on market transaction!)
If the deal does fall apart, then the buyer will typically have their earnest money refunded (double check your own contract for details specific to YOUR transaction) but they’ll still be out of some time invested in this house as well as the cost of the appraisal and any inspection expenses. While this feels like a loss of money, it’s probably a good thing – you spent a little to save a lot. And, overpaying for a house by $750,000 would have been a huge mistake.
If you’re the seller and the deal falls apart, you have different options. Perhaps you want to list the house for sale again and try to find someone else to pay $1,000,000. But, people will see that your house was off the market and will question the reason it’s back ON market. So when your agent tells the buyers agent that it didn’t appraise – that’s going to throw up some red flags.
And, depending on the first buyers financing, you might have some lending hurdles. For example, if it didn’t appraise VA – that stays in the VA database. It might also be in the database for the lending bank so now your new buyer can’t get their loan at the same bank that had the low appraisal.
As a seller, you might also decide that now is not the right time to sell so you take your house off the market. OR, maybe you decide to rent the house instead of selling. Lots of options.
Ultimately an experienced agent can help you.
When you work with an experienced agent, they are going to give you guidance to help you not list your house for $750,000 higher than market value. And, if you’re working with an agent to buy a house, that agent should be able to run comps and give you market value on the property to help guide your offer price. Sometimes appraisal issues come up no matter how experienced an agent is, but it certainly shouldn’t be in the $750,000 range. And, that experienced agent will be able to help you get a swift resolution!