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. There's no reason to panic if your appraisal comes in lower than you expect it to, though.
Do sellers usually lower their asking price if the appraised value is lower? Whether the seller decides to lower their asking price will depend on a number of factors, including how motivated they are to sell or if they have other offers above asking price.
A higher appraisal essentially hints that the buyers might have snagged a sweeter deal than they thought, paying less than what other similar homes in the neighborhood are going for. On the flip side, if the appraisal falls short of the offer, the ripple effects are more pronounced.
Experts suggest buyers prepare to offer 1-3% above the list price, but some real estate agents say 5% is an even better buffer to add to your budget. If you make an offer above the amount you were approved for by your lender and the appraisal doesn't support it, you're on the hook for the difference.
In a sellers market, it's not uncommon for homes to sell above their listing price or even their appraised value.
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.
Most appraisals come in at the right price. According to a report by Corporate Settlement Solutions (CSS), only about 8% of properties sold in the first half of 2024 sold for more than their appraised values. The biggest appraisal gap occurred in April 2022, when 20% of homes appraised for less than their sales price.
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.
Can the seller back out of a high appraisal sale? Can the seller back out if your appraisal is high? Realistically, the answer is “no.” For one, they accepted your offer and would be breaching the sales contract if they wanted to put the house back on the market to capture a higher price.
3. Ask The Seller To Lower The Price. Although the seller may have accepted an offer, as a buyer, you can ask the seller to lower the asking price to something closer to the appraised value.
A low appraisal could be very good for you as the home buyer — if the seller decides to lower the price to match the appraisal. However, you're taking a risk when the appraisal doesn't support the asking price. It could mean that the house is actually a lemon.
The seller often does not generally get a copy of the appraisal, but they can request one. The CRES Risk Management legal advice team noted that an appraisal is material to a transaction and like a property inspection report for a purchase, it needs to be provided to the seller, whether or not the sale closes.
If the buyer can't come up with more cash and the seller won't lower the price, the buyer may have no choice but to back out of the sale. If the purchase agreement doesn't contain an appraisal contingency, the buyer will lose their earnest money deposit and possibly even face legal action.
The appraisal gap coverage clause limits the difference between the appraised value and the purchase price. This can help you make a competitive offer while protecting you from paying more than you can afford.
“It has nothing to do with the seller; it is ordered by your lender, and payment is due regardless of the outcome,” says Maria Jeantet, a real estate agent with Coldwell Banker C&C Properties in Redding, CA. “It is typically paid by the buyer unless specifically negotiated ahead of time to be paid by the seller.”
If a home is appraised to be higher than the asking price, the lender will only issue a mortgage for the appraisal amount. This leaves the borrower to either cover the remaining cost on their own or return to searching for a home with a listed price that matches the appraised value.
The appraised value is important because it determines the maximum loan amount a lender is willing to provide, which can affect both the home buyer and seller. A higher appraisal can facilitate a larger loan for the buyer and support a stronger sales price for the seller.
MARKET CONDITIONS
When markets move faster than normal, appraisal values lag market prices. As mentioned, the appraisal process compares recent past sales. Backward looking data -- no matter how recent it is -- won't keep pace with present prices in high-velocity markets.
According to CoreLogic data, approximately 8% of home appraisals come in below the contract price, though this percentage can shift with changing market conditions.
Do appraisers look in cabinets? No, appraisers typically don't look inside cabinets, but they do need to check the condition and functionality of the kitchen and other rooms. Any visible signs of damage or wear can affect the appraisal value.
Poorly maintained homes or foreclosures have been known to drag property values down significantly. Their negative impact on appearances and security concerns will be taken into account when assessing area desirability levels.
Buyers get the appraisal report close to the closing date (at least 3 days before closing day). After the appraiser inspects the home, he submits the appraisal report to the lender. The lender reviews the report and will send it to the buyer.
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.
When you sell a house for less than its fair market value, you must report the difference as a gift to the IRS. Under IRS rules for the 2023 tax year, you can give up to $17,000 as a gift of equity before you pay gift taxes. As the seller and gift giver, you must pay the gift tax if it exceeds the limit.