OK, so you made a really high offer to compete for a home; perhaps even tens of thousands over the seller's asking price. Problem is, you don't have all the cash to make that purchase. You are relying upon a mortgage.
That means that the sale price must be acceptable to your lender, and that is determined by the appraiser. Even if you think the home is worth what you offered, what if the appraiser doesn't? What then? Answer: Cash.
By committing extra cash in your offer, above and beyond your minimum down payment and loan fees required, for the potential of a low appraisal, you send a message to the seller that you really are serious about giving them the price you offered, no matter what, and you might even be able to beat out competing offers bringing all cash to the table. Here's an example scenario:
- Buyer offers $575,000 which means lender's appraiser must agree that $575,000 is the fair market value for the property to get the loan.
- Appraiser turns in an appraisal to the lender that indicates a value of $525,000.
- Lender will only give the buyer a loan for a percentage of the purchase price or appraised value, whichever is less. In this case that's the appraised value, which means a loan amount of $472,500.
- To continue with the purchase at $575,000, the buyer must not only come up with the previously agreed percentage of the $525,000 (let's use 10% which is $52,500) but also the additional $50,000 to bridge the gap between the appraised value and agreed price, which would be a total of $102,500 down, in this scenario.
So to make the above example work in a purchase offer, the buyer would included a provision in the contract that commits in advance to bringing up to $50,000 additional down payment funds in the case of a low appraisal.
What happens if the appraisal is off by only $25,000? Then the buyer only has to come up with enough to bridge the gap, no more.
What happens if the buyer committed up to $50,000 additional down payment for a low appraisal in their offer, but the appraisal is off by $75,000? The seller could lower the price by $25,000 and the buyer come to the table with the additional $50,000 agreed to. However, the seller is in no way obligated to reduce their price and, if they won't, then we are back to the negotiating table. If no agreement can be made, the buyer should have the right to a refund of their earnest money, if their broker drafted a sufficient contingency in their favor.
There are so many details and possible combinations of terms that can be included in a purchase offer, especially in a competitive market. Whether you are a buyer or seller, be sure you have an MVP Realty Group expert in your corner to advise you.