Thursday, June 13, 2013

Can an Appraisal Make Your Contract to Sell Your Property Fall Through?

The Atlanta real estate market is about as fast and furious as I've seen it in my 19 years of experience.  It has become a scorching hot SELLER'S MARKET which is an about face from the "Extreme Buyer's Market" of 2008-2011.  
Prices are rising quickly and on many properties, multiple offers are coming in just days (or hours in some cases) after the sign goes in the front yard.  Buyers are freaking out because we have such a low amount of inventory available (75% lower than in 2008) that when a buyer finds a house they love, chances are, it already has offers on it.  This skewed demand vs. supply model has stimulated home prices to escalate, and many times the buyer may agree to pay full price or even more than full price to get a house.  A staggering 25.3% of all homes sold in the first quarter this year were at or above asking price, and it seems to me that that even more than that are selling for at or above asking price so far in the second quarter.
So what happens if you're the happy yet overwhelmed Seller of house that just went under contract for $8000 over your asking price??  What happens if the bank appraisal that was conducted in order for the buyer to get a loan falls short of the inflated price the buyer agreed to pay?
That depends on how your contract was written.  If the Buyer of your home has a Purchase Agreement with an Appraisal Contingency, the language is likely to say that if the appraisal from the Buyer's lender is less than purchase price, the Buyer shall have the right to request that the Seller reduce the sales price to meet the appraisal price.  If the Seller refuses to reduce the price to the appraisal price, the Buyer may void the agreement without penalty.  There is also usually a time frame that the parties agree to in which the appraisal has to be conducted and that time is often 21 days from Binding Agreement Date.  So yes, indeed Mr. and or Mrs. Over List Price, your deal can definitely fall through if your contract has an Appraisal Contingency.  You may not be willing (or able) to come down in price to the lower appraisal price.  You would also need to evaluate the appraisal to determine if it is accurate.  And, your agent can contest the appraisal (although the appraisal may not be adjusted even if it's incorrect).  Would you rather come down to the appraisal price or let the deal fall through and take your chances by going back on the market?
I am advising my Seller clients to try and negotiate that the Buyer will agree to pay the difference between the appraisal price and the purchase price if the appraisal is less than the purchase price- in other words, no appraisal contingency.  If there are multiple offers on a property, one of the Buyers is likely to agree to this if they have enough desire to purchase and the cash to back it up.
If you're a Buyer, BEWARE of the trap I just spelled out for you, especially if you're trying to minimize the cash you need to close.  If you don't have an Appraisal Contingency and the appraisal comes back lower than purchase price, you will have to pay the difference between the appraisal price and the purchase price!  Sometimes appraisers make mistakes and will not accurately appraise a house.  I just had this happen with a Buyer I represent.  The appraiser appraised a 5 bedroom house and said it was a 4 bedroom house, missed some square footage and used bad comps.  Ultimately, the appraisal was $17,500 lower than the purchase price.  Fortunately, the Buyer had an Appraisal Contingency and the Seller agreed to lower the price to make the deal go through.  Unfortunately, the faulty appraisal cost an innocent seller money. 
As always, I love and appreciate you and thank you so much for reading my blog.  And as I always say, "it pays to have a good Realtor"  big smile : )  Jackson Bass, Keller Williams Realty of Buckhead

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