"Below Value" Appraisals, why is the buyer required to pay?

Question

Hello, I'm brand new to BP but looking to learn quickly...which will mean asking lots of (but hopefully not to many "dumb") questions. This may be a question with an obvious answer, but I'm curious, when a property appraises for less than the purchase price, why is the buyer required to pay the difference? Thanks in advance!

Greg H. · Answer

That is not the case in any contract that has an appraisal/financing contingency which includes the Arizona Realtor contract.  The appraisal contingency states if the property does not appraise for the sales price the buyer may terminate and receive back their earnest money

Joe Funari · Answer

@Andrew Carter The only dump question is one not asked. But doesn't prevent other investors giving snarky remarks. But sometimes its to have a little fun. Regarding your question its the buyers lender they selected for the transaction. Thus, the buyer and lender have agreed on down payment amounts, length of loan, interest rates, etc. But the lenders always send an independent appraiser to assess the value of the property. In some cases the appraisers assessment of value comes in lower than the agreed purchase price. When this happens the buyers have two options. 1. Either bring the additional cash to closing to make up the difference. Or request the seller to reduce the purchase price to match the appraisal. Here in Texas if the seller doesn't agree to the lower price the buyer has the option to terminate the contract. From an investor perspective purchasing properties using traditional financing this isn't a bad thing. Because you are able to get the property at a lower price if the seller agrees to it. Hope this helps you in your REI journey.

Brad S. · Answer

Exactly, most people equate "value" directly with price/cost or dollar amount or market value, but they miss a main point. There are multiple types of value and we learn this, or should've learned this, in the appraisal world. One such concept is called "value-in-use" which may or may not be equal to the highest and best use of a property. Examples are: a Buyer paying a premium to live across the street from their parents. They would now have close "built-in" babysitters at anytime, etc. Or, Disney purchasing property adjacent to it's current park, so they can expand. That land has more value, beyond market value, to them, since it is contiguous to their current properties and would allow for seamless expansion. ...Or, when celebrities purchase multiple properties around their personal residence, to house their employees or just have additional security and privacy. ...there are many more examples.

Bill B. · Answer

The appraisals are based on the market and the comps (comparable sales).

But…

The owner-occupant buyer can and often does buy for non-financial reasons. Few buyers buy the home with the lowest cost per sf.  They buy and sometimes pay extra, because it’s in the right school district, near family, a family legacy, it could be the cheapest home in the area, amenities, etc.

And the investor can buy for financial reasons that aren’t based on the value of the house. I’ve seen million dollar homes torn down in MN where the average value is much lower. To that buyer they didn’t care if it had a 500sf shack or 5,000sf warehouse. It could have a bunch of land no home owner wants but they can sell to a developer or build a storage business. An 8 bedroom home may not appraise well, but to a STR operator it could be the dream.

Ask yourself, why did the buyer offer more than the appraisal? Either one of them is wrong, or it’s worth more to them.

Scott E. · Answer

The buyer pays the difference when a property appraises for less than the purchase price because the buyer is contractually obligated to pay the purchase price.

When a mortgage is involved, the lender will only lend based on the appraised value or purchase price, whichever is lower. So if the appraisal is lower, the buyer pays the difference.

Caroline Gerardo · Answer

Buyer is willing and makes a deal. Lender has no idea if the deal is right or wrong upon application. Lender is not the appraiser. Since 2008 lenders use appraisal management companies AMC and they have appraisers in regions. The AMC handles the collection of the fee usually by credit card. AMC assigns to an individual person who doesn't work for lender or AMC and appraiser has their own business. Appraiser has to pay for his license, insurance, work, time, and tools. Appraisers income average $50000 -$90000 a year depending on how many they can do and how many AMC's send them work. When the appraiser comes up low, it is because the buyer didn't research comparables up front and there aren't recent sales to support what is on the ground. Listing agent should be able to provide this information BEFORE you sign the contract, or before you order an appraisal, often this doesn't happen as buyer feels they are under the gun to chase this deal. Your buyer agent can assist with this process, and a great lender runs comps the day you apply. The lender is required by law to accept your conventional application but they can say- I don't see comps. Lender and appraiser do all their work and front the costs before your deal is closed.

Scott E. · Answer

Yes I know. I guess I'm not doing a good job articulating what I'm trying to say.

(I spent 15 years in the mortgage industry and over that time was a mortgage loan officer, mortgage loan processor, and mortgage underwriter. So I swear I'm not trying to speak out of my lane here lol. Guess it's just been a long week already)

Scott E. · Answer

You're right. But I wasn't speaking about the right to terminate. I just meant that they are obligated to pay the contract amount, if they proceed with the purchase.

Greg H. · Answer

That is not correct either.  While they may choose to pay the contracted amount, they can choose to terminate or use the option to terminate as an opportunity to renegotiate the price

"Below Value" Appraisals, why is the buyer required to pay?

Most Popular Reply