If a Home Doesn’t Appraise Can a Buyer Cancel the Contract?
There is a saying in real estate “a home is only worth what a buyer is willing to pay.” However, if a buyer is obtaining a mortgage a home may only be worth what a lender is willing to lend, and to find out how much a home is worth to a mortgage lender a home appraisal will be conducted by a licensed home appraiser.
Once the appraisal is complete the home will either appraise at, above or below the contracted price. If the home does not appraise for the contracted price some buyers can still obtain financing while others cannot.
So it’s no surprise when a home doesn’t appraise buyers and sellers aren’t always sure what happens next. Can the buyer cancel the contract? Is the buyer locked-in regardless of the appraised value? Does the seller have to reduce the contracted price to the appraised value? Let’s explore the possible outcomes if a home doesn’t appraise.
Understanding Contract Contingencies
The main question is, can a buyer cancel the contract if the home doesn’t appraise? The answer is it depends. It ultimately depends on the contract and the contingencies included or excluded in the contract. Is there a finance contingency? An appraisal contingency? A finance and appraisal contingency? No contingencies at all?
Let’s take a look at these contingencies and what can happen with each one if a home doesn’t appraise.
A finance contingency usually states a buyer has X number of days to obtain a mortgage and if they are unable to do so within that period they can cancel the contract. One of the many items a lender will require while going through the mortgage approval process is a home appraisal.
Now, if the home doesn’t appraise it doesn’t necessarily mean a buyer will be denied financing and can cancel the contract. Read that again, not all buyers will be denied financing if the home doesn’t appraise. Therefore, they won’t be able to cancel the contract, they will be forced to come up with additional funds to cover the appraisal shortfall.
Then there are some buyers who won’t be able to obtain financing if the home doesn’t appraise. When this happens they can usually cancel the contract.
An appraisal contingency states if the home doesn’t appraise for X amount within a stated period of time the buyer can cancel the contract. So if the home doesn’t appraise for the amount stated in the appraisal contingency addendum they will be able to cancel the contract. But only if it’s within the appraisal contingency period.
An appraisal contingency is the only contingency that guarantees a buyer can cancel a contract if the home does not appraise within the appraisal contingency period.
In a competitive real estate market, it isn’t uncommon for buyers to waive their finance and/or appraisal contingency. If a buyer decides to go this route they will not be able to cancel the contract if the home doesn’t appraise. In fact, they will have to come up with the additional funds and if they are unable to do so can find themselves in breach of contract. Meaning they could lose their escrow deposit and possibly be sued for performance.When a home doesn't appraise many people wonder if a buyer can just cancel the contract and get their escrow deposit back, here's the answer. #realestate #homeappraisal
Possible Outcomes When a Home Doesn’t Appraise
If a buyer is within their appraisal contingency period and the home doesn’t appraise there are 4 possible outcomes.
Seller Price Reduction
The outcome every buyer hopes for when a home doesn’t appraise is for the seller to reduce the price to the appraised value. In a buyers market, a seller may be willing to do so or at least be open to negotiations. However, a low appraisal in hot market may leave little to no room for negotiations.
Buyer Pays the Difference
Low appraisal seller won’t budge? Not every seller will reduce the contracted price to the appraised value, even if the buyer has the ability to cancel. In this situation, if the buyer really wants to purchase the property they can pay the entire appraisal shortfall.
Meeting in the Middle
If the seller won’t cover the entire appraisal shortfall but is open to negotiating meeting somewhere in the middle might be an option.
Now it may not be exactly in the middle but at least one party isn’t covering the entire appraisal shortfall.
So if a home appraisal is 30k lower than offer the seller might be willing to reduce the purchase price by $14,000 and then the buyer only has to come up with $16,000 instead of $30,000.
Cancel the Contract
If the buyer and seller are unable to come to terms the buyer can cancel the contract within their appraisal contingency period. It’s obviously not the outcome any buyer wants especially since they already spent money on the inspection and appraisal. However, sometimes it may be the only option.
What Happens if the Home Appraisal is Wrong?
Home appraisals are considered an art, not a science. So the home appraiser gets to pick and chose the comparable sales they use for the appraisal. They also get to decide on the types of adjustments they’re going to make and the amount of credit or deduction for each adjustment.
Therefore, home appraisals aren’t necessarily “wrong,” they’re basically opinions, a home appraiser’s opinion. So if 5 appraisers were to appraise the same property odds are they will come back with 5 different appraised values. One appraiser might make a $10,000 adjustment for a swimming pool while another may make a $25,000. This is a prime example of how appraisals can vary so much.
When a home appraises below the contracted price but there are 3 or more comparable sales that support the contracted price there are two options. So technically there are 6 possible outcomes if a home doesn’t appraise, not 4. However, not many buyers explore the last two options listed below.
Option One is to contest the appraisal, which can easily go nowhere because the appraiser has to admit they didn’t do their job correctly. However, there is nothing to lose, so it might be worth trying.
Option Two is to order a second appraisal. Not all lenders will order a second appraisal, which in that case the only way to get a second appraisal would be to switch lenders. But doing so can cause delays and in the end, the home may not appraise again.
Then certain appraisals, like an FHA appraisal, will stick with the property for a certain period of time, so a second appraisal will be useless. Unless the first appraisal was never logged into the FHA connection, then it’s as if the first FHA appraisal never took place.
Buyers should never make assumptions when it comes to real estate contracts and financing nor should agents. Just because a buyer has a finance contingency and agrees to pay X amount toward an appraisal shortfall doesn’t mean they won’t have to pay the entire appraisal shortfall if there is one.
As a listing agent, I’ve had sellers accept an offer with only a finance contingency and when the home didn’t appraise the buyer was stuck paying the entire appraisal shortfall because the lender said they could still get approved for financing. In those situations, the only way the buyer could cancel is if they had an appraisal contingency and/or received the appraisal back within the as-is inspection period and had the ability to cancel the contract.
So before buyers submit an offer they need to understand exactly what they’re agreeing to. Knowing their financial qualifications along with the risk they’re taking when including or excluding contingencies in their offer.
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About the Author
Top Wellington Realtor, Michelle Gibson, wrote: “If a Home Doesn’t Appraise Can a Buyer Cancel the Contract?”
Michelle has been specializing in residential real estate since 2001 throughout Wellington Florida and the surrounding area. Whether you’re looking to buy, sell or rent she will guide you through the entire real estate transaction. If you’re ready to put Michelle’s knowledge and expertise to work for you call or e-mail her today.