What Happens When a Home Doesn't Appraise for the Contract Price
When a home doesn't appraise for the contract price, it can present challenges for both the seller and the buyer. Here’s a breakdown of what happens from the seller’s perspective:
1. Understanding the Situation
What an Appraisal Is: An appraisal is an independent evaluation of the property's value conducted by a licensed appraiser. It ensures that the home's market value supports the price agreed upon by the buyer and seller.
Why It Matters: Most buyers who use a mortgage depend on the appraisal to secure financing. Lenders typically base loan amounts on the appraised value, not the agreed purchase price.
2. The Gap Between Appraisal and Contract Price
If the appraised value is lower than the contract price, the lender may only finance up to the appraised amount. For instance, if the contract price is $400,000, but the appraisal comes in at $380,000, the lender will base the loan on $380,000.
3. Options for Resolving the Issue
As the seller, you have several potential paths forward:
Negotiate with the Buyer: You may agree to lower the selling price to match the appraised value. While this might not be ideal, it ensures the sale moves forward without the buyer needing to bring extra cash to cover the difference.
Ask the Buyer to Cover the Gap: The buyer may be willing and able to pay the difference out of pocket. This depends on their financial situation and motivation to purchase your home.
Split the Difference: Both parties can agree to compromise, with the buyer paying part of the gap and you reducing the price for the remainder.
Request a Reconsideration of Value: The buyer’s lender may allow the buyer or their agent to challenge the appraisal by providing evidence that supports a higher value (e.g., comparable sales missed by the appraiser).
Walk Away from the Deal: If negotiations fail, you might choose to relist the property. This comes with the risk of market delays or needing to address the same issue with future buyers.
4. Impacts on the Sale
Delays: Negotiating a resolution or requesting a new appraisal can extend the timeline for closing.
Market Perception: If the deal falls apart and the home goes back on the market, prospective buyers might question why, potentially impacting the home’s appeal.
Financial Considerations: Lowering the price affects your bottom line, while relisting could mean additional carrying costs and effort.
5. Preventative Measures
Pricing Strategically: Work with your real estate agent to set a competitive and realistic price based on recent comparable sales.
Providing Information: Ensure your agent supplies the appraiser with relevant data, including upgrades or improvements, to support the value.
Pre-Appraisal: In some cases, sellers opt for a pre-listing appraisal to better understand the property’s market value before listing.
Ultimately, how you handle a low appraisal depends on your priorities, timeline, and willingness to negotiate. Flexibility and open communication with the buyer can often help you reach a resolution that keeps the sale on track.
