Possible Scenarios and Intriguing Permutations
Although there are ways to minimize the risk — and each situation is unique — there are times when a home that’s under contract doesn’t appraise.
Assuming that the standard Minnesota Financing Contingency Addendum applies, there are two main possibilities:
One. The Buyer’s financing contingency fails, and the deal’s off.
Two. The Buyer and Seller agree to renegotiate the sales price in order to preserve the deal.
Of course, it’s the second scenario — and all the potential permutations — that’s more intriguing.
At one extreme, the two parties could simply agree to reduce the sales price to the appraised amount; that way, the bank will still approve the Buyer’s loan without the Buyer having to put up more cash.
Obviously, that option doesn’t thrill Sellers.
At the other extreme, an especially motivated Buyer could opt to make up all the appraisal shortfall to preserve the deal.
As you might guess, most Buyers are reluctant to pay more than what a supposed expert just said fair market value was.
So, guess what the third scenario is?
Yup . . . . Buyer and Seller compromise on a middle ground, where the sales price is reduced — but not all the way to the appraised price — and the Buyer does in fact put up more cash.
Devil in the (Appraisal) Details
Which of the above outcomes is most likely?
It depends on a number of variables, including relative Buyer and Seller motivation; the presence (or absence) of other interested Buyers; how long the property’s been listed, etc.
However, the resolution often turns on the particulars of the appraisal itself (which belongs to the Buyer, who may or may not elect to share it with the Seller).
If the appraisal looks accurate, and includes well-chosen Comp’s and defensible adjustments, the Seller’s basis for challenging it is definitely weaker.
However, if it looks like the Appraiser was inexperienced and/or made a mistake (or several), the Seller may be more inclined to dig in, and not yield as much ground.
And then there’s what I ran into last Fall: a well-priced Minnetonka home that sold in multiples (I represented the Buyer) that — to everyone’s shock — didn’t appraise two weeks later.
The explanation (which emerged after several harried phone calls and emails): the appraiser mistakenly thought the sales price was $20k higher than it actually was.