When selling a home, the buyer will get a real estate appraisal.

What Is An Appraisal ?

You decided it’s time to sell your home. Soon you received a good contract from a ready and able buyer. Congratulations! Your home is sold!

Or is it? Because you may need to sell it again. And that’s because of the buyer’s mortgage company.

The mortgage company will be sending out someone to do a real estate appraisal on the property. And if the appraisal says that the the selling price is higher than the property’s value, you have an issue to address.

The Mechanics of the Appraisal

As an example, let’s say that you were asking $350,000 for your home. However, due to the lack of available homes in the area, numerous people who want to buy the home. As a result, a bidding war has started., and the selling price gets bid up to $380,000. Hey that’s great you think. We got $30,000 more than the asking price. Woo Hoo!

But now comes the issue. If the real estate appraisal comes in at $360,000, the buyer won’t be able to get the mortgage they need. And this is because the appraiser’s opinion is that the property  isn’t worth $380,000. The lender will only loan up to 80% of the home’s value, which means the buyer cannot get the necessary mortgage to proceed with the purchase. Here’s the numbers.
Purchase Price                                        $380,000
Down Payment 20%                                $76,000
Mortgage Amount                                 $304,000

Appraised Value                                    $360,000
Down Payment                                        $76,000
Maximum Mortgage                             $288,000

Under the scenario above, the buyer will be short $16,000 that’s necessary to close the sale.

What Happens Next?

If and when this situation arises, one of two things will typically happen.

First the buyer will somehow, find and extra $16,000 to make up short fall. However, this isn’t very likely. After all, if you were buying a home for $380,000, but your mortgage company said it was only worth $360,000, how would you feel? Most people wouldn’t like to overpay for the home by $20,000.

Here’s the second, and more likely option. The buyer will ask the seller to reduce the price by $20,000 in order to meet the appraisal, and therefore be able to complete the sale.

Exceptions

Many times, the buyer’s down payment is more than 20%, in which case they can probably borrow the necessary amount. And with other programs which require smaller down payments, they can also borrow the necessary amount. However, that doesn’t negate the fact that the buyer’s will feel they’re overpaying.

Bottom Line

What would you do in this situation? What I would do is reduce the price and let the sale go on. After all, I’d be getting more than I was initially asking for the home, and it gets done. And if the sale falls through, you may not get that price again.

When you’re ready to either buy or sell a home, please give us a call.

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