We’re seeing this happen more and more lately: a client goes under contract, we’ve finished the due diligence period. Now, the lender orders a home appraisal on the house to ensure the value of the chosen home is high enough to support the purchase price/loan amount. Surprise! The home appraisal comes back a week or so later and the home appraisal falls short.  It came in at a value LESS than the contracted price or loan amount.

In the last couple of boom years for sellers we’ve all been lulled into a sort of euphoria of rising home prices and quick sales. But the market tends to catch up with itself and correct itself. That’s what we’re seeing now: Home prices have stabilized and all those foreclosures which finally sold have contributed to this correction. It’s back down to Earth for all of us!

So, now what happens?

Regardless of whether you’re the buyer or seller, we’re going to have to open up the negotiations again. If you’re the buyer, your lender will NOT approve your loan for an amount more than the home is worth. Simple, no exceptions. Your future home is security for the loan and, by law, the home value must at least be as much as the loan.

So we, your agent, will contact the seller’s agent and negotiate a new price which at least lowers it to the appraisal amount in order to continue the contract. In most cases this is kind of good news for the buyer because it means they can’t “over pay” for the home and end up borrowing less to buy the home. The contract contains an “appraisal contingency” which states the deal will only move forward if the appraisal meets the loan amount as approved by the lender.

The seller will likely be as surprised, disappointed and dismayed as the buyer. They’ll probably agree to a price concession because they really do want to sell the home. They were just a little too confident in the asking price and the appraisal called them out. But they probably won’t be as willing to pay all the closing costs you originally got them to cover in the initial offer. They’re already going to have to take less money for the house; often they soften that blow by lessening the closing costs (or some other concession) from the original deal.

If the seller refuses to budge

If the seller refuses to budge on the selling price then the contract won’t work. We, then, formally withdraw your offer under the appraisal or financing contingency clause in the contract. The deal is now dead. But, what if you don’t want the deal to die and the seller won’t budge? Your only other recourse is to put more of your own cash in as a down payment – enough to bring the loan amount in line with the appraisal price.

When you’re the seller and this happens to your deal, just think of the roles reversed and you’ll understand what your options are. If you decide not to lower the contract price you’ll have to be OK with your house staying on the market longer. And the next buyer will likely encounter a similar appraisal situation.

You Need Help Through This Process

It’s a sticky situation and we’ve seen it happen in many of our most recent deals. That’s why you want experience agents – with seasoned negotiating skills – on your side. As a buyer or a seller.

At Cowan Home Team, we’re experts in these areas. Call us today and we’ll steer you through the choppy waters.