A seller asks: what happens if the buyer’s appraisal comes in below the sale price?

Back in the old days, like in 2008, appraisals were an important part of the financing process, but there was usually no cause for worry about this step from the perspective of either the buyer or the seller. Values were up and going up even more, and even with an offer that came in over the listing price, there was always a pool of comps to support the sale price.

We all see how well that turned out.

I spent the first eight or nine years of my real estate career without a single appraisal issue. But now, the appraisal is sometimes a hold-your-breath moment, followed up by another hold-your-breath moment when you get the lender’s sign-off on the appraisal (or not).

So, what happens if the appraisal comes back with a value that’s less than the contract sale price?

It depends.

If the buyer has an appraisal contingency, there are a few options:

1. The buyer can simply cancel the contract, walk away and get a full refund of his or her good faith deposit.

2. The buyer can also attempt to renegotiate the sale price with the seller using the appraised value as the basis for the new price. Either the buyer or seller can also pay for another appraisal — after all, appraisers are human and appraisals are opinions. Yes, theoretically they are very well-documented and reasoned opinions, but if the appraiser isn’t familiar with the local market, those opinions can be wildly off the mark.

3. Or, the buyer can bring the required extra cash to the transaction and close the purchase at the original agreed-upon price. Let me explain what that means. Say the contract price is $600,000 with a 20% down payment. The loan will be $480,000; the down payment, $120,000. But then the appraisal comes in at $550,000. The bank won’t make a loan that exceeds 80% of the appraised value — but 80% of $550,000 is $440,000. So now there’s a $40,000 shortfall. If the buyer has the resources and is willing to throw in another $40,000 to close the deal, then the deal is on track.

If the buyer does NOT have an appraisal contingency, he or she is bringing extra cash to the deal and buying the house, regardless of the appraised value.

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