If we guarantee the appraisal and it comes in low, how much more do we have to pay?

cash-house

In the insanely competitive market this year, with multiple offers often going W-A-Y over list price, sellers often ask buyers what they will do if the appraisal value comes in lower than sale price.

In the ‘old days’, buyers would often include a condition that the home must appraise for sale price or greater, or the buyer has the right to cancel the offer.

In today’s market, that kind of contingency can be the kiss of death.

Today, buyers may offer to pay up to $10,000 (or some other number) to bridge the gap if the appraisal comes in low. That helps, but what makes sellers sit up and take notice is when buyers give a full appraisal guarantee.

In other words, if the appraisal comes up short the buyer guarantees that they will not cancel or negotiate a lower price with the seller. Instead, if the appraised value is lower than the purchase price the buyer will make up the difference between sale price and appraisal value. They will do whatever the lender requires to move on to closing.

What does that mean in $?

For example, if your purchase agreement was for $500,000 and the appraisal came in at $470,000, you would have to come up with an additional $30,000 cash at closing to cover the gap in addition to your down payment.

$470,000 would become the new basis for the mortgage, and if you are putting 20% down, you would pay 20% of $470,000 ($94,000) instead of 20% of $500,000 ($100,000) so you save a little there.

Appraisals more often come in at value than below, but you still have to be prepared to bridge the gap if necessary if you include an appraisal guarantee. So many offers help support the value. Banks want to know if they would be able to sell the house again at sale price if the buyer defaults.

I had buyers who were one of 23 offers NOT selected for a house last weekend… ugh!  It is disappointing, but do not despair if you have a similar experience. In my more than 20 years in real estate, I find that when it is right things work out and fall into place. It may take a little longer this year, but it still happens. The weekend before, my buyers submitted the offer that was accepted… it was a perfect fit!

Sharlene Hensrud, RE/MAX Results – shensrud@homemsp.com

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I love what I do! Highly insightful, analytical and creative, there is nothing I love more than helping you find the right solution for your real estate transition. My mission is to serve my clients with honesty and integrity, exceeding their expectations in service and support… and to help others by donating a portion of every transaction to Habitat for Humanity.

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