There are four ways a transaction can proceed in the event of a low appraisal.
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If and when an appraisal comes in low during a home sale, here are a few solutions to help resolve the situation:
1. The buyer makes up the difference in cash. A low appraisal doesn’t mean the lender won’t lend on the property. The lender cares about the appraisal to the extent that it affects the loan-to-value ratio, which means they’ll only lend on the appraised value of the property. If the buyer has additional financial resources to do so, they can make up the difference in cash to proceed with their purchase.
2. The seller can lower the price. If the property was priced higher than its market value or its price was inflated because of multiple offers, this may be the best solution. Buyers often won’t purchase a property for more than its market value, regardless of whether they’re using financing or paying with cash.
3. Compromise on the value. There are instances where the buyer and seller settle somewhere between a cash contribution (from the buyer) and a price reduction (from the seller). For example, if there was a $10,000 difference between the contract price and the appraised value, the buyer may agree to bring a cash contribution of $5,000 and the seller may agree to lower the price by $5,000.
4. Terminate the transaction. If the buyer and seller can’t come to agreeable terms due to the low appraisal, the contract can be terminated. The seller isn’t obligated to sell the property for the appraised value. If the contract is contingent on the property meeting the appraised value because of financing and an agreement can’t be reached, the buyer has the right to terminate the transaction and receive their earnest money back.
If you have any questions about this or any other real estate topic, don’t hesitate to reach out to me. I’d love to help you.