Understanding the Appraisal Issue

In today’s market, there are many obstacles you are faced with when buying and selling a home. One of the major topics of the moment is appraisals. Now what would an appraisal have to do with buying or selling a home?
The appraisal is the keystone for lenders to base their lending limits on, aside from the buyer’s personal financial situation. Every purchase contract is going to have a financing clause that states:

Buyer will apply for new financing at the prevailing interest rate and loan costs based on Buyer’s creditworthiness…the Seller will be entitled to retain the deposits if the transaction does not close by the Closing Date unless (1) the Property appraises below the purchase price and either the parties agree on a new purchase price or Buyer elects not to proceed.

There are four options when this situation occurs.

1) The buyer can bring cash over an above the down payment amount and pay the difference, still being able to attain a mortgage on the appraised value.

2) The seller can reduce the purchase price to the appraisal price.

3) They can do a combination of 1 & 2.

4) Or, elect not to proceed with the purchase and sell of the property.

In this situation, if you are the seller your options are limited to reaching an agreement, not selling, or waiting in hopes of a cash buyer that will pay the difference. The main reason is due in fact to FHA rulings stating that FHA appraisals will remain attached to a property for a 6 month period. This means, depending on your circumstance you must be willing to reduce your sell price to appraisal value.

Buyer’s at times end up reaching a better deal because of this little contingency, but many deals are falling apart because neither party has the means to negotiate up or down. Most FHA buyers are only putting 3.5% down for a reason.

The moral of the story is be careful regardless of which side you are on, because going through negotiations, inspections, and planning how you are going to arrange your living room furniture, only to find out that you are paying well over market price for a home is not a comfortable scenario. Stay away from outrageously priced homes with sellers hesitant to negotiate. The well priced homes are out there they just don’t tend to hang around very long.