Appraisal Contingency
TLDR: If the buyer has an appraisal contingency (or a financing contingency that requires an appraisal) and the property doesn't appraise for at least the sales price, you may need to re-negotiate with the buyer.
After the buyer is approved for financing, the next step will be for the lender to order an appraisal to ensure that the house is worth lending on. The appraisal is a neutral, third-party valuation of the property that verifies the property is worth what the buyer has agreed to pay for it.
In practice, the appraisal inspects the house in person and compares it to other similar properties that have sold in the vicinity. They'll arrive at a final value of the property, which they'll provide to the buyer and to the lender. You will likely not get to see the appraisal unless the house doesn't appraise and the buyer is asking for a reduction in price. If you're not given the appraisal, you can assume it appraised for at least the sales price.
What happens if the house appraises for more or less than the agreed upon sales price?
Assuming the buyer has included an Appraisal Contingency or a Financing Contingency that requires an appraisal, these are the potential outcomes.
Example: The property didn’t appraise high enough
Let's say you've agreed with a buyer to sell your property for $215,000, but the property only appraises for $205,000, which means the buyer’s lender will only lend up to $205,000. If that happens, options include:
A. The buyer can come up with the difference ($10,000) in cash.
B. You can lower the purchase price to the appraisal amount (it’s common to request a copy of the appraisal before you agree to lower the price).
C. Some combination of A and B. Maybe the buyer can't afford to pay $10,000 out of pocket, but maybe they can afford an additional $5,000 in cash and you can meet you halfway by dropping the price $5,000.
D. If the buyer has included an appraisal contingency, they can walk away from the transaction and get their earnest money deposit back. If they forewent an appraisal contingency, they will forfeit their earnest money deposit if they terminate the sale.
Tip
If the house doesn't appraise for the purchase price, it’s likely in your interest to negotiate. Why? Because if one appraiser thought that the house wasn't worth what you want to sell it for, it's likely that other appraisers will conclude the same thing. If the buyer terminates the contract, you will need to find a new buyer all over again and risk the same issue with the house not appraising.
Example: "Comps"
Here’s an example of an appraisal, which compares recently sold properties (Comparable properties, commonly referred to as “comps”) to determine the value of the subject property.
