What happens when appraisal comes in between loan value and contract price (contingency, square foot)

[Marshall Gibson LP]

So I've got a property I'm selling that is currently under contract. Buyer came in with 20% cash down. Our asking price was at the top end of what square foot comps were in the area and we got a full price offer on the first day. We were thrilled and actually had a couple of higher offers that we turned down because they were putting less money down and we were worried about the appraisal.

Our buyer's option period is expiring soon and they are about to begin the appraisal. The appraisal will come in after the option period but before the 3rd party addendum expires. Based on how negotiations went during the inspection/option period, I'm a little worried that if the appraisal comes in below the purchase price (but above what his actual loan will be) as to what that means. Can someone tell me what usually happens in this instance? Is the buyer on the hook for the purchase price (since he has a lower loan amount)? If final purchase prices are based on comparable sales, which are based on purchase prices, how do appraisal values ever go up?

[MrRational]

Originally Posted by Marshall Gibson LP

...price was at the top end of what square foot comps were... and we got a full price offer on the first day.
I'm a little worried that if the appraisal comes in below the purchase price as to what that means.

It will mean that when push comes to shove...
you didn't get the full price top end price you thought you did.

[Marshall Gibson LP]

Originally Posted by MrRational

It will mean that when push comes to shove...
you didn't get the full price top end price you thought you did.

Can you elaborate on that?

[NinaN]

If the appraisal comes in lower than the asking price, and your contract has an appraisal contingency (which most do), then there are a few choices:
1. You reduce the price
2. The buyer comes in with the difference in cash (because the 80% LTV ratio will be based on the appraised price)
3. You meet somewhere in the middle
4. The buyer cancels

Have your agent remove the lockbox and make the appraiser call your agent for entry. Your agent should bring information to support the price:
- Upgrades in your home
- Issues with other sold comps (your agent can call the buyers agent in each of the sold comps for the real scoop)
- Anything else that makes your home more valuable
- Proof of the other higher offers

I did this with a home sale that I didn't think would remotely appraise, but when I dug into the comps each had some major differences or issues that don't show up on the pictures on MLS and appraiser would not know about such as steep lot, crumbling driveway, very dated features except the couple highlighted in the pics. It helped to have 3 full price offers to show. It appraised at contract price.

[DMenscha]

In that circumstance, the buyer has two options. Either add more to his down payment, or rescind the contract based on his appraisal contingency.

If I was your agent, I would try to make sure that the appraiser was apprised (I'm loving my choice of words there) of the multiple offer situation as that might reflect positively on the valuation.

Until that happens, don't sweat it.

Nina and I posted at the same time. What she said goes too

[Marshall Gibson LP]

Thanks for the info guys, I appreciate it.

[yousah]

The loan to value will be based upon the appraised value. So if you're buyer already has 20% DP then they have the option to use part of that cash to pay dollar-for-dollar above the appraised value for the house. The remaining part of their DP would go towards the loan to value ratio. So they would effectively end up with a loan that might be a 85% loan to value and need to pay for mortgage insurance. However, in reality most buyers don't opt to pay for more than appraised value.

[Annemieke Roell]

Originally Posted by NinaN

If the appraisal comes in lower than the asking price, and your contract has an appraisal contingency (which most do), then there are a few choices:
1. You reduce the price
2. The buyer comes in with the difference in cash (because the 80% LTV ratio will be based on the appraised price)
3. You meet somewhere in the middle
4. The buyer cancels

Have your agent remove the lockbox and make the appraiser call your agent for entry. Your agent should bring information to support the price:
- Upgrades in your home
- Issues with other sold comps (your agent can call the buyers agent in each of the sold comps for the real scoop)
- Anything else that makes your home more valuable
- Proof of the other higher offers

I did this with a home sale that I didn't think would remotely appraise, but when I dug into the comps each had some major differences or issues that don't show up on the pictures on MLS and appraiser would not know about such as steep lot, crumbling driveway, very dated features except the couple highlighted in the pics. It helped to have 3 full price offers to show. It appraised at contract price.

Seriously?

I don't know what kind of appraisers you deal with in your neck of the woods, but here appraisers do their due diligence and DO discover these things.

As far as meeting the appraiser at the house is concerned to point certain things out: unless the appraiser is Helen Keller, he/she can see those upgrades etc for him/herself.

The appraiser is supposed to verify sales by calling other agents. I would NEVER take an agents word for details on a sales unless that agent was involved in the transaction.

Proof of other high offers? That and about $1.50 will buy you a cup of coffee.

[SmartMoney]

I agree, most appraisers today politely accept anything any agent gives them and puts it in the trash when they get in. If they need agent input, they call and it's usually not the agent involved in the subject transaction, but a comparable sale to verify information, such as amenities or other interior features.......they best be walking the comps and shooting their own pix, or they'll be cut from the panel when the shortcut is discovered. We occassionally see the accommodating appraiser (oddball sales price of $392,394 and the appraisal comes in at $392,500), but that's the exception.

Appraisal Management Companies (AMCs) are getting their first taste of audits and it's rather interesting to see their reaction to the process. And, I think it's just a matter of time before the real estate sales world gets in the action......if they own a mortgage company, that audit will be sooner, than later. I wonder how long it will be before that ABA business is sold. Are we having fun yet?

[MrRational]

Originally Posted by Marshall Gibson LP

Can you elaborate on that?

When the appraisal comes back at a number $X thousands below your "comps" based asking price...
you'll be pressed to lower (actually negotiate the price) the price downward by that amount.

If you want to sell anytime soon... you will do exactly that.