A home appraisal is one of the most important stages in a real estate transaction, and possibly the most nerve-wracking. The purpose of an appraisal is to verify the market value of a home and to make sure the property is worth the price the buyer is paying for it. Sometimes, an appraisal comes in lower than a contract sales price. I’ve helped a lot of clients navigate their way through this type of situation and I get a lot of questions about this topic, so I thought I would write a blog post about it.
When a home appraisal comes in lower than the sales price, a new phase of negotiation begins between the buyer and the seller. A buyer is not obligated to purchase the property at a price that is higher than market value. Also, a buyer's loan will be based on the lower appraised value, not on the sales price of the property. This means that if a buyer still wants to proceed with the sale at the agreed upon price, they’ll have to make up the difference between the appraised value and the sales price by increasing their down payment by this amount.
Often, a buyer will ask the seller to lower the sales price to the appraised value. However, sellers don’t always agree to do this. A seller might counter by suggesting that they compromise and “meet in the middle,” halfway between the appraised value and the contract sales price. Negotiations continue until an agreement is reached, or until an agreement cannot be reached and the deal falls apart.
Another option in this type of situation is to order an appeal of the appraisal. In a real estate transaction, the appraisal is ordered by the lender and paid for by the buyer, but the appraisal report is technically the property of the lender. If a home appraisal comes in lower than the contract sales price, the lender will typically allow a buyer to appeal the appraisal. However, the appeal is often made to the original appraiser, who is not necessarily eager to reexamine their work and suddenly come to the conclusion that they made an error in their original appraisal report. If a buyer can point to a significant oversight or mistake that was made, such as not accounting for an extra bathroom or some expensive upgrades that a property has, the appraiser might very well be open to adjusting their report. However, if their original appraisal is based on solid reasoning (and most of the time, it is), the appeal process often results in the appraiser simply reaffirming their original conclusion and not changing the appraisal.
The other important thing to remember here is that the appeal process can only be initiated by the buyer, so the buyer can request an appeal if they wish, but they are under no obligation to order one. If they really love the property, they’ll be more likely to order an appeal because they’ll want to try everything possible in order to be able to purchase it.
If the home appraisal is lower than the sales price and no appeal is ordered, the seller doesn’t have to accept the lower price. After further negotiations, buyers and sellers are sometimes able to reach an agreement on the final price, and sometimes they’re not. If no agreement is reached, the contract becomes void and the property goes back on the market.
If you're in the market for a home in Northern Virginia, email me at DarrenRobertsonHomes@gmail.com or call me at 703-462-0700. I'm an experienced buyer agent who grew up in this area and has extensive market knowledge.
If you own a Northern Virginia home and are thinking of selling, contact me for a no obligation home value report. This will give you a good idea of what your property is worth in the current market.