If your appraised value is lower than the agreed upon sales price, you'll have to make up the difference in cash, or cancel the deal.
Earnest money may be refunded if the house doesn't appraise for more than the purchase price, thus affecting the ability of the buyer to get a mortgage. Financing contingency. If the buyer, in good faith, applies for a mortgage but is turned down, the earnest money can be refunded.
Typically, earnest money is used to show that you are committed to purchasing the property and is held in escrow until closing. If you decide to back out of the contract for reasons not covered by contingencies in the contract, such as financing or inspection contingencies, you may forfeit your earnest money.
Contingencies are conditions that must be met before a real estate agreement is legally binding. An appraisal contingency is a clause that allows home buyers to back out of an agreement if the appraisal value of the property is lower than the purchase price.
Yahoo Finance tip: Your purchase contract must include an appraisal contingency, which states you can back out if the appraised amount is too low. Otherwise, you will forfeit the earnest money you put into the deal if you walk.
In most cases, it's still going to be the buyer. “The buyer is usually required to pay the appraisal fee upfront, and it is owed even if the lender does not move forward with a loan,” says Lee Dworshak, a real estate agent with Keller Williams LA Harbor Realty in Rancho Palos Verdes, CA.
The funds remain in the trust or escrow account until closing. That's when they get applied to the buyer's down payment or closing costs. Alternatively, you can receive your earnest money back after closing.
The earnest money deposit serves as the liquidated damages amount in real estate contracts. If the buyer defaults, the seller can keep the deposit regardless of the actual amount of damages. That also means that if the damages are higher than the liquidated damages – you're out of luck!
Whatever the reason for deciding to back out of the purchase agreement and wanting your earnest money deposit back, you should first contact the seller in writing. Inform the seller in writing that you wish to back out before the contingency deadline ends. Your real estate agent can help you with drafting the letter.
A low appraisal can put your dream home out of reach if you're a buyer. Meanwhile, for a seller, a low appraisal can impact not only the sale of your current home but also the purchase of your next home.
Financing contingency: Buyers will get their earnest deposit refunded if they're unable to secure financing for the home. An example is if the buyer is unable to qualify for a mortgage during the underwriting of the loan or if the property doesn't meet the lender's standards.
Consumers have the option of filing a complaint regarding their appraisal or evaluation directly with their lender, or through the lender's federal regulator. Visit HelpWithMyBank.gov for more information about how to contact your lender's regulator and how to file an appraisal complaint.
The above issues might seem concerning but, according to Fannie Mae, “the vast majority of appraisals confirm contract price.” In fact, they come back low less than 10% of the time. So, chances are, you won't run into this issue.
The seller is bound by the contract.
Just because the appraisal shows the seller may have underpriced their property, they don't have the right to walk away from the deal.
If you decide you want to dispute the appraisal, work with your real estate agent to reconsider the value. You'll typically need to back up your request with comparable evidence, such as comparable properties or records indicating that the initial appraisal used incorrect or incomplete information.
Backing out of an offer for a non-contingent reason means you risk losing your earnest money. Since you put that money down based on the promise that you would follow through with the contract, backing out for any reason that's not outlined in the agreement means the seller is legally permitted to keep your money.
Simply put, if you don't have all the required money at closing, you won't be allowed to close. This could lead to a seller lawsuit and/or forfeit of your earnest money deposit. As such, investors need to understand how to A) calculate closing costs; and B) secure additional financing, if necessary.
Under California law, you can sue the seller and the agent for not returning your full earnest money deposit (EMD) if you believe the liquidation damages they claimed are unjustified or inflated.
Once you remove your contingencies, you risk losing your earnest money. You will likely have forfeited your earnest money if you change your mind after removing your contingencies.
In general, earnest money is returned to the buyer if the seller terminates the deal but is awarded to the seller if the buyer unreasonably terminates the deal.
If something goes awry early in the deal, the deposit is usually returned to the buyer without a fuss. Both parties are usually willing to negotiate a fair solution even when things go wrong later in the transaction.
A sales contract with a kick-out clause allows you to continue marketing and showing the property. If by the kick-out clause date you find another buyer willing to pay the sales price despite the lower appraised value, you can 'kick out' the original buyer and accept the new offer.
When a home purchase falls through, unfortunately, buyers must cover the appraisal costs. Lenders order the appraisal and expect reimbursement from the buyer.
In the world of property purchases, it's pretty standard for the sales price listed on the contract to be on par with the appraised value. This makes sense, as the agreed price usually mirrors the going rates in the current market.