What happens if the house “doesn’t appraise?” You might have heard this through the grapevine or through friends or something like this before, “the house didn’t appraise,” or “the house did appraise – we’re saved! And what exactly does that mean, and what about the house appraisal under selling price?
Table Of Contents
- What Is Value?
- Market Price vs Appraised Price
- The Three Methods For Opinion Of Value
- House Appraisal Under Selling Price
- Your Options
- Waive The Contingency?
- Know What You’re Doing?
What Is Value?
So an appraisal, if you’re familiar with the show Antique Roadshow, is from a professional who is giving an opinion of value, and what is value?
There is something called market value, which is what a buyer is willing to pay for something, and then there is the appraised value, which is what an expert professional determines is the value of something.
So going back to the example of the Antiques Roadshow. You might have like this super old plate, and then some guy says, “yeah, that’s worth $20,000.” That’s the appraised value.
Maybe then you go to an auction and some particular person really, really likes it, and they decide to spend $100,000 on the plate.
Was the appraiser wrong?
Not necessarily. It’s just a different way of determining value.
The appraiser through his expertise decided that $20,000 was a reasonable price, but somebody paid $100,000 for it. That would be the market price vs the appraised price.
Market Price vs Appraised Price
What does this mean for you if you’re buying a home with house appraisal under selling price?
If you’re getting a mortgage, and let’s say you settle with the seller. When you make a contract that the the price will be $250,000, but the lender is going to go based off the appraised price not the market price, and they do that to protect their own interests.
They’re not just lending out money for all these over-inflated markets, especially in hot markets such as Dallas-Fort Worth.
What that means is that they’re going to send an appraiser to the house, and they are going to give their opinion of value.
The Three Methods For Opinion Of Value
An appraiser does this with three methods, and they all combined into one final value at the end:
- The Sales Comparison Approach. Which is similar to what we Realtors do, and that is to determine the market value of the house in the way that is done is by looking at comps (comparable sales) of other similar homes in the area that sold within ideally the past 90 days.
- The Income Approach. Pretend that the house is a rental/investment property that produces income. Look at how much homes to go are renting for in that area, and we can assume that the house is worth this much.
- The Cost Approach. Let’s say there is an Act of God, or a tornado comes in and and takes the house away. How much would it cost to rebuild the house from the ground up?
Afterwards, they are going to look at all these different methods, and combine them into one value. (More preference is given to the sales approach value for residential property.)
House Appraisal Under Selling Price
Once they do that…
(They are a third-party separate from the lender and from the realtor and from the buyer and from the seller. So they have their own unbiased opinion)
…They’ll tell the lender/bank or whoever you’re getting your mortgage from the house is worth this.
Remember, let’s say your example offer is $250,000, but the appraiser tells the lender it’s only worth $230,000.
What it means for you is home appraisal under selling price. It’s not so good.
The lender will only loan you an amount that makes sense for a $230,000 home.
Let’s say you’re doing 0% down – no down payment- so the lender is only giving you $230,000.
Now you have three options:
- Pay the remainder in cash by yourself. You have a contract with the seller, and the lender is not going provide everything that you need with house appraisal under selling price? You can go ahead and just pay the rest and buy the home.Understand a lot of people aren’t happy with that, and that’s why in the beginning of this video I say house appraisal under selling price can be a big shocker.
- Back out of the deal. The Texas real estate contracts has a contingency baked into the language. It gives the buyer the right to back out of the deal if for house appraisal under listing price.That is to protect you the buyer from getting into a deal where the prices inflated, or maybe you’ve been given bad information about the house value. So you’re not trapped into putting up all this money.
- Renegotiate with the seller. As a Realtor this is the best thing you can do, and the reason for that is quite simple. You’ve already come this far as a buyer. You want to buy this house or we wouldn’t be here.The seller also wants to sell the house. Assuming both parties are reasonable people, they can look at the facts and hopefully come to some kind of compromise that satisfies both parties and allows the house to be sold.
The incentives on both sides are equally strong. The buyer has invested a lot of time and a little bit of money into having the house inspected.
You love the house. You want to live there. You’re intending on buying.
You don’t want to go back out to the market, and start all over. Maybe you won’t be able to find this house, and the seller has already committed to selling this house.
For the seller, if this deal doesn’t go through, they’re going to have to put the house back on the market. That means going through all that again, and finding another buyer.
Both sides have the incentive to find a compromise.
This is something that can always come up, and usually it’s near the end of the underwriting loan process. It comes near the end, and it can be a shocker for everybody.
Waive The Contingency?
FYI: One final option is the contingency that is in the contract that allows the buyer to back out. The contract has language where the buyer can scratch out and waive the contingency – wave bye-bye.
Basically giving the seller a sense of security saying, “hey, I don’t care what the appraiser says. I’m buying this house!”
In a competitive market you might consider doing that. Even though it could mean more money on the line, but it will give you an advantage.
Know What You’re Doing?
An ounce of prevention is a bucket-load of medicine.
Remember, make sure before you make an offer that you have correct market information, and hopefully from a Realtor. A Realtor that he or she knows what they are doing.
They’re providing with this information so you don’t over bid some ridiculous amount, and end up getting into a house appraisal under selling price situation.
I hope you learned something. If you did I please like this video and share, or feel free to comment below or ask any questions.
Real estate is one big family!
Call Jonathan Alpart, REALTOR© now, and get help with your house appraisal under selling price today! (682) 207-2823