We sold our home last year and during the process our appraisal went by without a hitch, actually everything went as well as we could have hoped for. However, recently it was brought up in a discussion between my wife and I—what happens if the appraisal on a home comes back less than what the buyer offered? Are the buyers able to change their offer accordingly or are they contractually obligated to continue through and purchase the home with their original offer? Like I said, the appraisal on our house was smooth as silk, but it just got us curious about what the options would have been if things had not gone so smoothly.
Thank you for taking the time to answer our question!
Sarah and John, Grand Junction
Sarah and John,
Congratulations on your smooth transaction last year! It’s always a blessing when all aspects of a sale go smooth and without any significant speed bumps. As I am sure you are aware, speed bumps are just part of the process and a low appraisal can be one of the most significant speed bumps one can encounter on the road to closing!
Low appraisals become more common when a market gets very active and rapidly appreciating prices are hard to substantiate with past sales. It can also be an issue, like it was here in 2011 & 2012 when the large number of foreclosures cloud the data and keep an artificial lid on potentially rising market values. Luckily on the Western Slope we have been seeing very sustainable and verifiable appreciation levels and although we occasionally see low appraisals, it is the exception not the rule. When an appraisal does come in low, there are several options, but all the options generally lead to give and take from both parties involved in the sale.
Unless the buyer waives their right to an appraisal, there is an appraisal provision in every Colorado contract to buy and sell that provides the buyer an escape clause if the home they have under contract does not appraise at the contracted price. There is no contractual obligation to purchase any property that does not appraise. In fact, Colorado real estate contracts are designed with the intent to protect the consumer. Remember, if the appraisal comes back low, you still have options.
The first most logical option would be to get a second appraisal, if both parties agree that the first one was, for one reason or another, not as accurate as it could have been. If the lender will allow a second appraisal, then this is a reasonable choice and both parties can hope that the value comes in at the contracted price.
The next option is to amend the purchase price down to the appraised value. This is not a very popular option for sellers, however very popular with buyers! Funny how it works out that way. On the flip side, the next option is to keep the agreed upon purchase price and have the buyer make up the difference between the appraised price and purchase price in cash at the time of closing. Funny how this is a very popular option for the seller, however not very popular with buyers. Another option, and by far the most popular, is they meet in the middle. Say the appraisal comes in $6k low, the seller lowers the price $3k and the buyer brings an extra $3k to the closing table to bridge the gap and get the deal to the closing table.
Ultimately a low appraisal generally comes down to how bad the buyer wants to buy and how bad the seller wants to sell and thus the reason that the “meet in the middle” option is the most popular! There are far too many scenarios to go over here, as a low appraisal can have other, more far reaching impacts. More often than not it just takes everyone coming to the conclusion that a win/win is better than a loss! Count your blessings and I hope this gives some simple insight into a complicated and very unwanted situation!
The Kimbrough Team