As the real estate market in the Charlotte area continues to recover and prices increase, a growing trend in real estate transactions are homes that are not appraising for the contract price. The appraisal is a valuation ordered by the Buyer’s lender to ensure that the property is worth equal to or greater than the contract price. Even the best appraisals are an opinion of value and with the new rules instituted in the Dodd-Frank financial reform bill, it’s all too common that a home doesn’t appraise.
So what are the options when this situation occurs?
The first thing I check for on a low appraisal is to see if the comparable properties used in the appraisal are recent sales and if there aren’t better sales that should have been used. Two months ago, I had a listing in south Charlotte that appraised $30,000 less than our contract price and the Buyer wanted the seller to sell the home for $30,000 less. A quick search of recent sales uncovered a home that had closed around the time of the appraisal that was not used in the report. That sale was for $25,000 more than our asking price for a very comparable sale. The result: the seller re-listed the home and the next buyer purchased for $25,000 more than even the last Buyer was willing to pay. Had we not checked, it could have cost our seller a net loss of $55,000.
If there isn’t a clear discrepancy with the appraisal itself, the only solutions left are:
- The Seller agrees to sell the home for the new appraised value
- The Buyer agrees to pay the difference in total
- The Buyer and Seller agree on a compromise
- The Buyer and Seller terminate the contract and the home goes back on the market.
In North Carolina, if the home doesn’t appraise, that doesn’t immediately signal that the Buyer can terminate nor does it obligate the Seller to reimburse for any expenses the Buyer has spent during the Due Diligence Period. For example: if a Buyer receives their appraisal report the day after the Buyer’s Due Diligence Period passes and the home doesn’t appraise, if the Buyer terminates, they would lose their Earnest Money Deposit as well as all of the funds spent during Due Diligence. Therefore it is always critical for Buyer’s to have their lender order an appraisal early so that it can be received and reviewed during the Due Diligence Period.
There is one exception to his and it has to do with Buyers that are purchasing a home with a FHA mortgage. In the case with a FHA mortgage, the Buyer’s lender assigns a case number to the property with the FHA. As a result, the FHA appraisal that is ordered remains tied to that property for up to six months regardless of the Buyer or their lender. So, in the case of a Buyer that uses a FHA mortgage and has a FHA appraisal for less than the contract price; that appraised value will remain tied to that home until the appraisal expires in six months.
Additionally, FHA and VA mortgages are the only mortgages than require their own addendum which adds an appraisal contingency that will protect the Buyer if the home doesn’t appraise – even after the Due Diligence Period has expired. So in the case where an FHA appraisal doesn’t meet the contract price, beware of any future FHA Buyers for the next few months.