Wow, 27+ years as a Mortgage Banker! I have seen the occasional short appraisal! I started in November 1989 because I wanted to become a Homeowner so I chose a path which would get me there: Mortgage Professional.
Times were tough back in that market. Interest rates were high and property values had dropped dramatically. The employment picture for many Americans wasn’t very promising. There were a lot of foreclosures and homeowners had a hard time refinancing their mortgages due to lost equity. Sounds very similar to our recent post-meltdown market with the exception of the interest rates (11% in 1989!!!).
I received a valuable part of my education early on in my career as I dealt with purchase transactions where the appraisal came in for less than the purchase price. Buyers, Sellers and their respective Realtors are all “IN IT TO WIN IT” and make the deal happen.
I carry that education with me to this day when my HomeBuyer clients ask me at application time, “What happens if the appraisal comes in for less than the Purchase Price?” I know many HomeBuyers may think it’s a NO-BRAINER: the Seller will automatically reduce the price. But that is NOT the case right out of the gate. Here’s what I learned all those years ago about appraisals that come in short:
When the bank appraisal comes in for less than the contract price
there are FOUR ways to proceed with the transaction.
- The Purchaser comes up with the difference in cash. If the appraisal is less than the Purchase price, the Seller basically assumes the Purchaser wishes to buy the house according to the terms of the contract, including the agreed upon Purchase Price. Therefore, the Seller assumes the Purchaser will come up with the cash necessary to complete the transaction.
- The Purchaser and the Seller meet in the middle. The Purchaser comes up with some cash but the Seller also agrees to reduce the price enough to meet the Purchaser somewhere “in the middle.” Both sides want to complete the transaction and so they work it out. This is compromise at its best.
- The Seller reduces the Purchase Price to equal the Appraised value. This is the least likely scenario, but not an impossible one. Sellers often want to complete the purchase transaction on the original terms of the contract, including the price. But a determined Purchaser working with a great Realtor, by digging in and working hard to negotiate can often make it happen.
- Nothing happens and the deal is cancelled. The Purchaser either cannot or will not come up with the extra cash and the Seller refuses to reduce the price completely or even a little bit to meet the Purchaser. In this case the transaction is cancelled, the Down Payment is returned, and everyone goes home unhappy. The Purchaser has to begin all over again and the Seller has to put the house on the market and try to find a new Purchaser.
In the end, the motivations of all parties to make the deal happen and close the transaction rule the day. Those motivations drive everyone to find a solution and get the deal closed. Or not.
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Happy House Hunting!