An appraisal is an evaluation completed by an appraiser hired by the buyer’s lender. The appraiser will go the the property and evaluate the value of the home. The goal of the appraisal is to determine the value of the property as part of the loan process.
Scenario 1 — Appraisal comes in below value: If you offer $1,010,000 on a home where you will put 20% down and the appraisal comes in at $1,000,000. Your loan amount is 80% of the the appraised value at $1,000,000: $800,000. Your downpayment is $210,000 ($200,000 +$10,000 gap).
Scenario 2 — Appraisal comes in at value: If you offer $1,010,000 on a home where you will put 20% down and the appraisal comes in at $1,010,000. Your loan amount is 80% of the purchase $808,000. Your downpayment is $202,000.
Often buyers will offer to cover a specific amount when they send in their offer. They keep the appraisal contingency, but agree to cover a maximum amount ahead of time. Here’s the verbage used in the offer:
If appraisal comes in below purchase price, buyer will cover up to $XX,000.00 with a cap at the purchase price.
Removing the Appraisal contingency tells the seller that you are not going to renegotiate the purchase price if the appraisal comes in below the purchase price. It’s implied that you will not cancel escrow due to a low appraisal.
While you’re not supposed to cancel a contract due to a low appraisal when you do not have an appraisal contingency in place, I have seen and heard from other agents that buyers will use the loan contingency or an investigation contingency to pull out of escrow safely and still get your earnest money deposit back.
I had a buyer buy a home for $675K with no appraisal contingency. They chose to double app and pay for the extra appraisal. The first appraisal came in at $655K. The second appraisal came in at $675K. If they had not chosen to double app, they would have had to bring an extra $20k out of pocket to cover the difference.
I’ve also broken it down into 3 short videos to explain
You’ve got questions and I can’t wait to answer them.