Thursday, April 25, 2019 / by Pamela Glende
It is a strong seller’s market and homes are selling fast. Most homes if priced at market value or slightly below are receiving multiple offers. Currently we have just over a month’s worth of inventory. A balanced market is 5.5 months of inventory. There are more people looking to purchase a home than we have currently for sale on the market. The result is that there is bidding wars on homes.
So, what could happen when you choose an offer on your home which is much higher than market value? If the home doesn’t appraise at the agreed upon purchase price and the appraisal is lower, we have a problem.
These are the things that can be done.
1.You could lower the purchase price to the appraised value.
2. You and the purchaser could meet in the middle. Example the purchase price was $250,000. The home appraised at $240,000. You could reduce the purchase price to $245,000 and the buyer could bring $5,000 to closing from their own funds. Keep in mind that the buyer would have to have these funds to bring. The bank will only lend on the appraised value.
3. Buyer can bring the difference to closing. Example the home appraised for $240,000 but the agreed upon purchase price was $250,000. Buyer can bring in the $10,000 to closing or increase there down payment by that amount if they choose to, but they would have to have these funds.
4. The worse scenario is you refuse to drop your price and the buyer can’t or won’t bring funds to the table and the deal falls apart.
So here is a strategy that I recommend to my sellers. Don’t accept an offer that is too high unless you are prepared to lower the purchase price if the appraisal is low. Another important thing to consider when going over the offers is are the buyers asking you to pay their closing costs? If they are and the home appraises lower you still will have to pay those costs and lower your purchase price.
Here is an example. The home was listed at $250,000. The buyer offered $257,500 and asked you to pay their 3% closing costs of $7,500. So, the offer essentially is $250,000 because you will be paying their 3% closing costs. Then the appraisal comes in at $245,000. Now we have a problem. The buyer doesn’t have extra funds that why they asked you to pay their closing cost. You’ll have to lower the purchase price to $245,000 as per the appraisal and still pay their 3% closing costs of $7,350 (because purchase price is lower). What you will be ending up with is $237,650 at closing.
Another thing that could save the deal and is a good thing to look for in an offer is a form 22AD. This is “Increased down payment for low appraisal addendum to purchase and sale agreement”. The buyer in this addendum can fill out that they are willing to bring in “X” amount of funds should the home appraise lower. This is a great addendum to have in your contract for the seller. In a bidding war some buyers will include this in their offer to make their offer stand out. So, if the home is listed at $250,000 and the offer is $265,000 and the buyer has agreed to bring up to $10,000 to the table in the event of a low appraisal the seller would have the security of knowing the buyer truly wants the home and is willing to bring up to $10,000 in the event of a low appraisal. So, let’s say that home appraised at $260,000 but the offer was $265,000. The buyer would bring in the needed $5000 and the seller would get their $265,000 for the home.
If I can be of assistance or service give me a call.
Thank you for reading.
Haven Real Estate Group