Oh no, the property you are in the process of purchasing did not appraise, now what?!
Let’s discuss what an appraisal is, why it’s important, and how it benefits a buyer. A real estate appraisal establishes the market value of a property. Whenever a buyer chooses to mortgage a property, the bank lending the money will perform an appraisal on the property being financed. The reason for an appraisal is to determine the value of a property and make sure the property is worth the amount of money a buyer is willing to spend and a lender willing to lend. Lenders need to make sure there is nothing at the property that will devalue or possibly increase the worth of the property. Ideally the appraisal will match the sale price, but every once and awhile this does not happen. It is important for a buyer to know if the subject property does not appraise she could possibly be overpaying! If a property does in fact appraise for less than the purchase price, the lender will only loan up to the appraised value.
For example, if a buyer has an offer of $130,000.00 on a 3 bedroom house in Cheektowaga, New York but it only appraises for $110,000.00 a lender will only loan up to $110,000.00. Buyer will then be short $20,000.00! It’s completely natural for a buyer to become upset and possibly debate whether or not she wants to purchase the house. But…it’s the perfect house, she’s fallen in love, she planned where her Christmas tree is going next year and where to plant the garden! What now?! Phew, take a breath, it is okay, fortunately here are options.
First thing is first, your real estate agent will contact the seller’s agent and let him know the property did not appraise for the purchase price. Typically agents will renegotiate price and seller and buyer will settle on a new price—usually the appraised value. Sometimes though, this doesn’t happen. A couple reasons a seller and buyer may not settle on an appraised value is because the seller/seller’s agent may believe the property is worth more or the buyer is willing to spend the extra money to purchase the property. Say what? Yep, this can happen. A buyer can choose to overpay for a property if he or she chooses to do so. Since the bank will not lend the additional money, the buyer would have to come up with the money through another avenue. And believe it or not, sometimes a new price can be renegotiated AND a seller could still overpay. Let’s look at an example of this: Buyer has an offer on a property for $250,000.00. Property appraised for $200,000.00. Yikes, $50,000.00 short. Buyer’s agent and buyer have discussed the market value of the property, but buyer says, “I’m still willing to pay above market value for the property, but only up to $230,000.00, because I love it and I can use my 401K money.” Buyer’s agent contacts seller’s agent to renegotiate price at $230,000.00. All parties are happy and an addendum is signed.
Another possibility is for the entire contract to end. In Western New York, if the property is being mortgaged, your real estate contract is contingent upon the appraisal. Buyer may realize she does not want to property because it is worth less or perhaps a new price cannot be negotiated. Sad as it is, this can happen, but always rely on the advice and expertise of your realtor.
Appraisals can be stressful, but if a property is priced right, usually an appraisal is not an issue. Trust that an appraisal exists to protect buyer’s investment, not to discourage buyers from actually purchasing a property. Your real estate agent is also a licensed professional that can help you through the appraisal process. Agents understand what happens at an appraisal (we often attend them) and how to help buyers (and sellers) if an appraisal does not come back perfect. I can’t say it enough, trust your realtor, especially during difficult times. We have trained for these type of situations and we always have our client’s best interest in mind and heart!
Thanks for reading!