What happens when the house appraises lower than the accepted Purchase Offer?
Courtesy of my broker, here's an idea to add to the contract for those that don't already include it.
The California form makes the Loan contingent upon the house appraising and allows they Buyer to cancel.
However, there is no provision for the Seller to reduce the price in case the appraisal comes in lower, which is happening a lot.
Of course the Buyer can walk, but why not move the deal along rather than cancel it!
Putting the following wording into your offer may save the deal:
This sale is contingent upon property appraising at equal or greater value. In event property appraises lower than purchase price, the seller agrees to sell and buyer to buy at the lender's appraised value". Should seller cancel purchase contract, Seller shall refund to buyer all buyer's costs to date, including building inspection and appraisal costs.
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I can tell you as a listing agent I would cancel that out of my contract. It's not that it's a bad idea but in the best interest of my sellers there is no way I would advise them to accept that condition.
ohhhh, now there is an interesting idea. Not sure how the seller would be about refunding any of buyers costs though.
As an REO Listing Agent I get the feeling that buyers are just bidding up knowing that the property won't appraise and know they will get to renegotiate.
Not sure what would happen if we saw that clause come in - very interesting - hats off to your broker.
That sounds like a great deal for the buyer. I wouldn't want to place my seller's in that position though. Fortunately my listings have appraised for the agreed upon sales price ...so far.... :)
The buyer may get a bad taste from a low appraisal and find other reasons to walk away. Why not try to get a qualified appraiser? Work with lenders who do not use AMCs, request an appraiser with at least 5 years of experience or other credentials.
By the way guys this post became a duplicate, so if you saw another one I deleted it. I was bouncing back and forth answering people in two places.
Brian - You know I would probably balk at that also as a Listing agent, however, this is good incentive to have the Seller get an appraisal before listing and an excellent one to get them to price the house correctly. I think the above example is a little weak because the an appealed appraisal could quite easily come back up to the price. But if it is significantly lower, then the house was priced unrealistically.
John, I doubt that would be applicable in an REO situation since the price of the house, bid up or not, should be well below the market value, don't you think.
Sonja, there you go, your have been dealing with reasonable Sellers.
Moshe, In California we have no control over whom the lender uses as an appraiser. We as agents can no longer touch that.
Jane,
I thought it was an agents job to correctly price a house. It would be great to get your seller's to have an appraisal up front but it's not likely in our neck of the woods that you'll get them to pay for two since the seller typically pays for the appraisal in Idaho.
Add to that our market is moving so quickly that an appraisal done up front may no longer be accurate by the time we get to closing.
Brian, you are absolutely right about getting the appraisal done too early. BTW in So. Cal the Buyer pays for the appraisal. However, this is still good for the unreasonable Sellers. Those that are way off the mark to bring them back to reality. Starting closer to a realistic price is going to prepare them for the offers that come in. And here in Los Angeles right now were are close enough or at bottom in certain areas :)
I like it Jane. I've lost a couple of loans myself when this has happened.
I am going to email you privately with a question, Rick :)
Hi Jane! Because I represent alot of sellers, there would have to be a different clause than that for my sellers to agree to it. We've been having such a rash of appraisers who do not know the area, bringing in low appraisals and they are just way off base sometimes. There has to be some safeguard added to protect those sellers--just don't know how to word it to be fair to both sides! That's the key--both sides!
Have a wonderful Sunday...
There's the catch, Debe. We have the same problem here with out of area appraisers. There's a law that needs to be enacted right there.
We are not really talking about those wacky appraisals. The listing agent knows what the house is worth, as does the buyer's agent and if the appraisal comes in at a ridiculous amount then it is time to sit down an talk to the lender and tell them to get real.
I had a situation where the underwriter cam in $100,000 below the actual appraisal. It went back 3 times and came back the same. It was so ridiculous I can't even get my head around it. We changed lenders immediately, from a broker to B of A who actually fund the kind of loan we were applying for and it all went through at the correct price in less than 30 days. And the Seller patiently worked with us.
So, maybe there can be a cut-off amount in the clause which eliminates the ridiculous, but wouldn't have a clue how to word it.
I am going to pass this on to my broker to think about. Any ideas and I will get back.
Thanks for checking in.
I was involved with a seller a couple of years ago, that had a simialr situation- the appraisal came in lower than the agreed upon sales price- we modified the price and pushed the sale through to closing. It would not have made much sense to do anything else-
Certainly worth discussing with sellers in advance as a pre-emptive plan in the event the home does not appraise out. However, adding a penalty such as "all costs" has a low probability of being successful.
Jane - I, too, have had appraisals come in low. The subject was priced correctly according to comps in the area but the appraiser used comps outside of the area - WHAT? Ours was not a ridiculous amount so we were able on most occasions to get them to work out. I know that most of my sellers would not like that clause. Pre-appraisals are AWESOME!
Jane, you want to be careful that your language does not obligate the seller to lower the price. We are seeing multiple offers coming in over the asking price, and some of them are in backup position. In the case of a low appraisal, there is often an issue about the appraiser being from out of the area and way off on his valuation. In these cases, the seller needs to have the option of backing out and taking a back up offer.
Allison, Absolutely right. That wording was thought up in the event that the house is overpriced and the appraiser is a genius.
Leesa, same thing. I have passed this on to my broker. Not that it is anything I would use either. I wonder why she didn't think that through. We would have to put ourselves in the Seller's shoes, and I wouldn't sign it.
Patricia, I agree. The Seller also needs an option to have a buyer using a lender who is using an intelligent, knowledgeable appraiser. But, in the multiple offer case, those houses are usually well-priced so should not really have that issue. One can only hope anyway.
In any event guys, I thought the idea was good and still is if the wording can be worked out. Basically, to stop a Seller not budging for a few thousand dollars and the Buyer stuck with money out-of-pocket.