What Does the Appraisal Have to Do with Sales Price?

Posted by Lise | Filed under: Sellers

Congratulations! Your home for sale in Bethesda, Maryland is under contract.  Out of all the homes for sale in Bethesda or the condos for sale in DC, your home is the one the buyer chose!  Now the next stage of anxiety begins.  Your buyer has to get a loan.  Before you ratified your sales contract, your agent got a lender letter from the buyer’s agent to verify that the buyer was qualified to buy a home in the price range for which your home is listed.   End of story – right? Your home is under contract to a qualified buyer!

Not so fast!  Your home still has to appraise for the sale price.  It is very important to understand how a real estate appraisal can affect your real estate transaction as you  move forward toward settlement.   An appraisal is an estimation of a property’s value in relation to other homes for sale in Bethesda. It is primarily used by mortgage lending institutions to assure them that there is sufficient value in the property to cover the amount that a buyer will be borrowing.  We are lucky in Bethesda, Chevy Chase, and other areas close in to DC.  There are not many foreclosures for sale in Bethesda or Chevy Chase.  Most buyers, including first time home buyers, are well qualified!

A qualified appraiser will review a property and compare it to similar properties in and around the same area. The similarities will be things like square footage, number of bedrooms, bathrooms, etc. They will also take into account specific unique amenities that other similar homes may not have.

This is then compared to the actual sale prices of properties that are similar. It does not take into account the previous asking prices of those homes, just the price they sold for as recorded through the public registry office. This price data can often be a few weeks, to a couple months, out of date. Depending on current market conditions prices may have moved more or less than than an appraisal can actually estimate.  Normally an appraisal will only use sales of similar homes near yours in Bethesda that have sold within the past six months.

The Appraisal Price Can Be Lower than the  Sales Price

Many people are surprised when appraisals come in lower than expected. You must be prepared for this because appraisals do sometimes come in at less than the contract price. This can be due to the time lag from comparable price data used in the calculation, as stated above, or due to the appraiser’s assessment of your home’s improvements. Remember, it is only an estimation – but it can derail your sale.

Generally  it is the bank that has requested an appraisal. And the appraisal value is suited to their needs, not the buyer or seller. The bank needs to be sure that the amount being borrowed can be covered by the value in the property.   Appraisers have been burned over the last few years and blamed for over valuing many properties which later ended up in foreclosure.  The appraisers are now very cautious about over estimating the value of properties, and so many sellers (and buyers) are surprised by the valuation made by the appraiser.

What Do You Do Now that Your House Didn’t Appraise for the Contract Price?

If your house doesn’t appraise for the contract price, the next steps are up to the buyer.  The addendum of clauses to the GCAAR sales contract provides in paragraph 9 that if  the Appraisal is lower than the Sales Price, the Buyer has the option of proceeding with this Contract at the stated Sales  Price without regard to the  Appraisal.
This assumes that the buyer is financially capable of proceeding with the contract under the new appraisal terms.  For example, the buyer and seller agree to a sale price of $500,000, and the buyer is going to put down 20% or $100,000 (plus closing costs) and expects to finance $400,000. Unfortunately, the house appraises for $450,000.  The bank will only lend  80% of the appraised price of $450,000, so the bank will only lend $360,000.  In order to get to closing at the original sales price, the buyer must pay in cash the difference between the bank’s loan amount of $360,000 and the sale price of $500,000 or $140,000 rather than $100,000.  Suddenly, the buyer has to come up with significantly more money than previously expected.
Alternatively,  the Buyer  may decline to proceed with the contract at the stated sales price (due to the appraisal being lower than the stated sales price).  Then the Buyer must  deliver to the  Seller, by the deadline, a notice (See GCAAR Buyer’s Appraisal Notice), requesting that the sales price be reduced to a specified lower amount of not less than the appraised value, together with a copy of the appraisal.
If the Buyer fails to Deliver the buyer’s appraisal notice by the deadline, the buyer’s appraisal contingency will continue, unless the seller at the seller’s option, prior to seller’s receipt of the buyer’s appraisal notice, gives notice to Buyer that the deadline has passed and the Contingency will EXPIRE. If Seller Delivers such Notice, this Contingency will EXPIRE at 9 p.m. on the third day following Delivery of Seller’s Notice, unless prior to that date and time Buyer Delivers Buyer’s Appraisal Notice. If this Contingency expires pursuant to the terms of this paragraph, this contract will remain in full force and effect.  All Notices (under this Appraisal Contingency) Delivered subsequent to the Delivery of the Buyer’s Appraisal Notice shall be treated as  follows:
WITHIN 3 DAYS AFTER NOTICE DELIVERY FROM ONE PARTY, THE OTHER PARTY MAY:
1. Deliver Notice accepting the terms contained in the other party’s Notice: OR
2. Deliver Notice continuing negotiations by making another offer; OR
3. Deliver Notice that this Contract will become void at 9:00 p.m. on the 3rd Day following Delivery, unless the recipient delivers to the other party notice of the acceptance of the last delivered offer prior to that date and time, in which case, this Contract will remain in full force and effect.
FAILURE OF EITHER PARTY TO RESPOND WITHIN 3 DAYS AFTER NOTICE DELIVERY WILL RESULT IN THE CONTRACT BECOMING VOID.
WHY IS THE APPRAISAL IMPORTANT?
When the property doesn’t appraise, it is hard for the buyer now to pay the sales price for the property.   After all thebank has just told the buyer that the sales contract price is inflated.  As the buyer is threatening to walk out the door, what options does the seller have? Very simply, the seller can cave and accept the buyer’s lowered offer which matches the appraisal or the seller can ask for a release to put the house back on the market.   This is why it is important to get the price right at the very beginning so that the house will appraise, the contract will proceed, and your house will be under contract and then sold for top dollar as quickly as possible.   Better to negotiate up front for a real sales price than the be hit a week or two before settlement with the need to change the sales price!
Get the best real estate listings & homes for sale, expert advice, local info, and much more from a Washington, DC, Chevy Chase and BethesdaMaryland real estate  expert- Call the Lise Howe Team to sell your home!

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24 Responses

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