What is the role of the appraisal?
If an offer for a home is contingent on a mortgage, the lender will require an appraisal. The percentage of the purchase price that the mortgage company is willing to give the buyer is based on the appraised value. If that value is lower than the purchase price, it means that the bank won’t necessarily lend more than that amount. In that scenario, the bank would lend less than what it would if the appraised value matched the purchase price. So the appraisal determines what the bank will lend.
What if the appraisal is low?
Depending on how the offer is structured, if the appraisal comes in lower than the purchase price, the buyer may have the option to terminate and receive all deposit money back. If the buyer has included any appraisal gap coverage in the offer, that buyer may still be bound to continue in the transaction (if the gap between appraised value and purchase price is less than the gap coverage). Either way, the buyer and seller have the option to negotiate regarding the price (or other incentives) to save a deal when the appraisal comes in low.
How can the deal be saved?
If the appraised value of the property is below the purchase price, all is not necessarily lost. The buyer may be able to make up the difference in cash, for example. If they don’t have it, they could ask for a seller’s assist to reduce the amount of cash they need to close. They may also choose to borrow a higher percentage of the appraised value (for example, instead of an 80% loan, they may go to an 85% loan, as those percentages are based on appraised value).
Maybe there are other ways the seller could “sweeten the pot” to make it worth it to the buyer to find a way to stay in the transaction. Maybe furnishings can be negotiated so the buyer has less money that needs to be spent to furnish the house. Maybe the seller offers to cover the buyer’s transfer tax. Sometimes a change in settlement date can provide cost savings to a buyer. There are definitely creative solutions to a low appraisal, but sometimes buyers and sellers cannot find common ground and a transaction falls through.
What can I do to be prepared?
While there is no way to know the value the appraiser will arrive at, it is a good idea to be prepared for a discrepancy. Before you ever write an offer, discuss with your lender what choices you have. You might also explore whether you might have access to more cash, even temporarily. Gifts from parents, liquidation of some assets, a family loan….decide whether any of these could work for you. Simply understanding the role of the appraisal and what options you have if it comes in low will put you in a much stronger position if you find yourself in that situation.
Please also see this post on appraisal gap coverage and this one on why appraisals are often inaccurate.
If you are relocating to the Philadelphia/Main Line area, please go to my blog page and search for posts using the relocation tag. Contact me to discuss your Philadelphia area relocation! jen@jenniferlebow.com/610 308-5973
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