In today’s hot housing market, competition to win bidding wars can result in offers tens of thousands of dollars above list price. So what happens when you’ve won the bid with a competitive offer on a home only to find that the house appraises below your offer?
When a home buyer uses a lender to purchase a home, the lender will require the home to be appraised. This is the lender’s way to gauge the risk of making the loan. The house is used as collateral in case the borrower defaults (can’t pay the mortgage), so the lender wants to be sure the loan isn’t too big for what the property is worth.
If the home doesn’t appraise at the purchase price, as a buyer, you actually have a range of options. Let’s take a closer look.
If you are worried about paying more for a home that didn’t meet appraisal, you can walk away from the sale. It’s important to know that in the Greater Cincinnati area, a standard purchase contract already protects you from being required to buy a home that doesn’t appraise at your offer price. You’ve got your out if you want to terminate the contract.
Negotiate a Lower Price
Because you no longer are obligated to buy a house that didn’t appraise for what you offered, you can ask the seller to lower the price. They may or may not come down to the appraised value. Say your offer was $15,000 over the appraised value. They might be willing to split the difference with you and come down $7,500. It’s definitely worth negotiating.
Cover the Difference
If you’ve been through a home search for a long while and really want the house, you do have the option of covering the entire difference out-of-pocket. If the seller is unwilling to lower the price, this could be your fastest way to clinch the house.
Dispute the Appraisal
If you or the seller disagree with the appraiser’s opinion of value, you have the ability to dispute it. However, this may not be easy to do since you’ll need to gather plenty of evidence and put it in writing. A dispute involves showing valid, accurate comparable sales that are contrary to the appraiser’s, making a list of features or upgrades the appraiser missed, or finding an error in the appraiser’s report.
What’s Appraisal Gap Coverage?
If you’re in a very competitive housing market, you may already be aware that any offer you make could be over the appraised value. To gain a competitive edge, some buyers are using an appraisal gap coverage clause in their purchase contract to make their offer more attractive to sellers among multiple bids. This is a when the buyer agrees to cover any gap between the offer and the appraisal (if any exists) right off the bat. The clause in the contract may state a dollar limit the buyer is willing to go over an appraised value. Note, using this clause will mean you are obligated to the purchase contract even if the home does not meet its appraised value.
While no one gets excited about the prospect of paying more than what a professional appraiser says the home is worth, it’s a reality buyers might face in a fast-moving market. It makes sense to be knowledgeable about your options as a buyer.
Real Estate Term of the Week
Appraisal Gap Coverage: When you agree to cover any shortage between the offer price and the appraised value. It’s written into your offer and often includes a specific number of how high you will go. Its purpose: to show the seller you are serious about the home and are willing to pay more.