Appraisal contingency
If your offer is contingent on the appraisal of the property, here is what could happen.
If the appraisal value is lower than the sales price, you, as the buyer has the option to cancel the sale and get your deposit back.
Before that happens, the buyer and seller usually renegotiate the sales price until they come to an agreement.
If the seller is willing to reduce the sales price to the appraised value, then there should be no problem for you to continue on with the purchase.
However, if the seller insists on a sales price higher than the appraised value, it is not unusal for the buyer to still buy the property for a price above the appraisal value for many reasons. If the market is going up, the comps for the appraisal just hasn’t caught up. So you are not overpaying because the market value is in fact higher than the appraised value.
Another reason is if the house is a unique property that cannot be compared with comps in the neighborhood. For example, if it has a very large lot, or very expensive and intricate woodwork, or special styling and design, an appraiser cannot give it an appropriate dollar value, but value is certainly there.
Another reason is if the property suits your needs in terms of location and amenities, you may be willing to pay a little more for it. I had this type of situation with a buyer. I told her honestly that the property is overpriced. But the house was exactly what she wanted, so she paid about $10,000 above appraised value. She has lived there over 15 years, and that $10,000 made no difference now. If she had not bought that house, later she would’ve regretted not paying a little more for it.
Another reason to pay more than appraised value is if there just isn’t anything else on the market that is any better. You may have seen other houses priced higher, but not any better than this property. So compared with everything else in the market place, the value is there.
Appraisal value does not take into consideration all these various factors.
Liz Said,
June 9, 2008 @ 4:52 pm
I know this is a blog from 2005 but it’s still a pertinent question. We just were in contract to buy a house for $692k but the appraisal came in at $590, $102k difference. It was a somewhat unique house. How would you analyze that situation? How would you view the appraisal? (we got a second appraisal that came in at $620) We ended up walking away from the house and there was another buyer behind us. We could not justify that much of a difference.