Calculating the Risk that a Low Appraisal Will Scuttle a Deal
In a market with lots of first-time Buyers (like today’s), it’s a question I’ve been fielding a lot this Spring: ‘when should I give notice to my landlord?”
The (usually) safe answer: ‘once the Inspection Contingency has been removed.’
That is, after the Buyer’s home inspection has been completed, and the Buyer and Seller have resolved any issues that came up.
By convention — at least in Minnesota — that’s also when the home’s status on MLS is changed from “Active” to “Pending.”
“Yes, But . . . “
But, don’t agents (like me) counsel their Selling clients that “it’s not a done deal until you get paid at closing?”
And, doesn’t the Buyer’s financing still have to be finalized, which in turn requires that the home has to appraise?
My response to both questions: “yes, but . . .”
Unlike Sellers, who don’t know for sure how strong the Buyer is financially until their lender vouches for them, the Buyer knows their own financial situation quite well.
And so does their lender, and therefore so does their agent (who works closely with the lender).
So, Buyers know how much margin they have (or don’t).
Still Ahead: the Appraisal
But even a financially bullet-proof Buyer still needs the home to appraise, correct?
“Yes, but . . .”
In a rising market (like today’s), appraisal risks have been receding generally. See, “Appraisal Multiple Choice — Spring 2013 Edition.”
For argument’s sake, say the risk of a home not appraising today is 10% – 15%.
But even that overstates the risk, because — just like inspection issues — when a home fails to appraise, most Sellers opt to “take their lumps” with the current Buyer (and renegotiate the purchase price), vs. risk losing the deal and having the low appraisal reduce the sales price on any subsequent deal.
Bottom line?
In my experience, something like 75% of the time low appraisal issues get resolved by the Buyer and Seller, and the deal holds together.
Do the math, and you come up with only a 3% chance or so that a low appraisal will scuttle a deal these days.
