The appraisal is an important part of many mortgage loan financed residential real estate purchases. The appraisal is usually ordered at the buyers requests, and sometimes paid for prior to closing. The appraisal is done by a third-party appraiser, who provides an opinion as to the value of the real estate. The opinion is based on the type of analysis the appraiser performs.
Common appraisal methods include: the Sales Comparison Approach; the Cost Approach, and the Income Approach. The Sales Comparison Approach uses recently sold properties that are similar to the subject property, applying adjustments for variations, to determine an estimated value. The Cost Approach basically uses an estimation of the value of land and the price it would cost to build an equivalent building on that land (Cost of Land + Cost to Build – Depreciation). The Income Approach uses the income or anticipated income generated by the property to determine a value. .
What happens if the appraiser’s estimated value comes in lower than the agreed upon purchase price?
Sometimes there is subjective value to a buyer that exceeds the appraisal done by a third-party appraiser, and that buyer may decide to proceed with the real estate purchase knowing the appraisal was lower than the purchase price. Lenders may permit the buyer/borrower to provide additional funds at closing to cover the difference. If a buyer/borrow cannot come-up with the difference, or even if they can, the buyer and seller might agree to a reduction in the purchase price to reflect the appraisal value. Additionally, a buyer might want to contest the appraisal, pointing to errors or omissions in the report.
What can I do to protect myself, if the appraisal doesn’t come in at the agreed upon purchase price?
Some attorneys will negotiate a clause, pursuant to the Attorney Review (Section 10 in MBRE 7.0), permitting the Buyer to cancel the contract if the appraisal doesn’t meet or exceed the agreed upon purchase price, or to allow the parties to negotiate a lower price. Even without such a provision, if a buyer cannot obtain financing because the appraisal value was too low, they won’t be able to get the loan commitment, and therefore won’t be able to close on the purchase.
Does a Seller have to lower their purchase price if the appraisal comes in low?
No, unless that is a stipulation in the contract. However, a seller may be compelled to reduce the purchase price, because there is no guarantee that a subsequent prospective buyer may be able to get a better appraisal, and/or the seller may not want to re-list the property.
If you are unsure about your obligations/rights, or would like to speak with an Attorney regarding your real estate purchase/sale, please contact Blume Law
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