What happens when an appraisal is higher or lower than the purchase price?

[CJ Moulton]

Hey BP,

What happens when an appraisal is higher or lower than the purchase price?

Lets say you put in an offer for a house at $200k, and it gets accepted. Once the appraisal is complete, the value is now $150k. 

What exactly happens to that $50k? and vice versa, what if the value is goes up to $225k? Where does that $25k go?

Any advice is greatly appreciated! Much love.

[Ke Nan Wang]

In a case the appraisal is high, nothing happens and the lender will lend the buyer the loan amount and all parties proceed with the transaction and the buyer would feel good about the purchase because there is instant "equity" in this purchase.  

In a case the appraisal is low, the lender will readjust the loan amount because the value of the property is not what it said it was. The buyer has a few options based on the contract: 

1. If the buyer still wants the property, the buyer can either 

              a. renegotiate the purchase price with the seller. Maybe find a happy medium where the seller's willing to reduce and the buyer can bridge the new reduced gap via cash to the table. 

              b. if the seller is firm because the seller believes the appraisal is wrong and there is no problem finding another buyer, then the buyer has to bridge the gap with cash 100%. 

              c. if time allows and buyer believe the appraisal is wrong, challenge the appraisal or even find another lender with a new appraisal and pay for all the additional cost out of pocket. This is a less likely scenario out of the 3.                

2. If the buyer doesn't want the property anymore, then the buyer can cancel the contract and then either lose the deposit or get the deposit back depend on whether there is an appraisal contingency clause in the purchase and sales agreement. In the Florida standard form, other than the AS-IS contract, the rest have the appraisal contingency as a standard clause. Also FHA and VA addendum has that language in there too. It's meant to protect the buyer.