In super-hot real estate markets, which can consist of limited inventory and many buyers vying often for the same home, motivated homebuyers might feel the need to offer a higher purchase price. Often, that offer price is too high to justify by their lender's appraiser. This could result in what is known as a "low appraisal."
However, sellers should not let the possibility of a low appraisal stop them from choosing an offer that might be higher than the home will appraise for. Sellers have options.
- Receiving multiple offers doesn’t mean your home was priced too low.
- Some buyers may offer to pay for some or all of the gap between the sales price and the appraisal price.
- Choose the offer most likely to close, even if it’s not necessarily the highest offer.
What Can Happen in Seller's Market
Let's look at a typical example of what can happen in a hot seller's market. First, the homes that buyers often want to fight over are those that have these qualities:
- In the best condition
- Priced right
- In a high-demand neighborhood
- Generally located in an extremely desirable school district
If the home you're selling has all of these qualities and has been on the market for a short period of time, it's a sign that you, as the lucky seller, might receive more than one offer. This is especially true if you see a high level of interest during your home showings.
What to Consider Before Accepting Offers Over List Price
It is common for sellers to get excited when a bunch of purchase offers arrive, all exceeding the list price. Here's the first thing a seller is likely to think: "Oh, my gosh, we priced the home for too little."
This is a logical thought, but it is not necessarily true. Generally, receiving multiple offers means you priced the home just right. Offers over list price reflect the excitement and determination of a buyer to be chosen as the winning offer.
Beware of emotional letters submitted with the purchase offer. While some of these letters may come from the heart, some may be copied directly from the internet. There are many websites where buyers can download and rewrite a letter designed to tug at your heartstrings.
Sellers should try as best they can to remove emotion from the decision to sell. Becoming emotional can be the first step to a lower bottom-line profit.
Now, look at the sale price again. Some buyers may believe that if they offer a price higher than any other buyer, the seller will grab their offer like free money falling from the sky and sign it.
But sellers have to consider the consequences of what could happen if the home does not appraise for that amount. If the home will not appraise for the purchase price, it means the lender will not agree to lend a high loan-to-value balance. Of course, if the offer is cash, there typically is no appraisal.
The best offer to accept is the one that is likely to close escrow. And it might not be the offer with the highest sale price.
Offers Over List Price That Might Not Appraise
Let's say, for example, that the seller of a beautiful home in a highly desirable neighborhood in Elk Grove, California, decides to list their home at a price of $550,000. Perhaps the comparable sales within a half-mile radius suggest a top sales price of $549,000, making his home priced aggressively. However, due to low inventory and high demand, the seller receives three offers. They are:
- Offer No. 1 from Jane Eyre: $560,000 from a buyer with a 3.5% down payment and an FHA loan. This buyer has a foreclosure on her record within the past five years. Jane will not bridge the gap between loan and appraisal, but she will agree to pay $1,000 more than any other buyer.
- Offer No. 2 from Arlo Guthrie: $557,000 with 10% down and a conventional loan. Arlo offers to pay any difference between the appraised value and the sales price, up to a maximum of $5,000.
- Offer No. 3 from Joe DiMaggio: $559,000 with 3.5% down and an FHA loan. This buyer has submitted another offer to the listing agent on another property with similar terms and simply hopes for the best.
As a seller, you might be tempted to take the offer from Jane Eyre. After all, who knows about appraisers?
An appraisal is just one person's opinion of value, and it could differ from appraiser to appraiser. The market shifts and changes constantly. New comparable sales could appear, or an appraiser could give more toward upgrades than another appraiser. There can be a lot of flexibility between appraised values.
You might want to consider the worst-case scenario: The home could appraise at $550,000. In that case, Jane Eyre would cancel her contract. Not to mention, offers such as "I will pay $1,000 more than the next buyer" can be deemed not to be legally acceptable offers; this is because there is no real sales price offered. This is sometimes called an escalation clause.
On top of this, it is possible that Jane's lender will not qualify her to buy any home due to her foreclosure, as this is an underwriter's option. This could be a red flag.
The purchase offer from Joe DiMaggio seems meaningless when Joe is ready to buy the next home and doesn't seem to be committed to this particular purchase. Joe's loan is the same as Jane's. Joe has already shown that he is not following protocol, and it is considered unethical—though not against the law—to write an offer for more than one home when the buyer cannot afford to buy both homes.
Besides, what kind of buyer's agent sends two different offers for two different homes to the same listing agent? This has trouble written all over it.
The only offer in this scenario that makes common sense for the seller to choose is the offer from Arlo Guthrie. It's clean, and the buyer is willing to put his money where his pen signs. If the home only appraises at $550,000, the seller will receive an additional $5,000 from the buyer.
Frequently Asked Questions (FAQs)
What happens if an appraisal is higher than a purchase offer?
If the appraisal is higher than the purchase offer, it means the buyer has immediate equity in the home. The seller can't pull out of a signed contract because the appraisal is high. They could end the contract if other contingencies aren't met or if the buyer's financing falls through.
What is an appraisal contingency?
An appraisal contingency is a clause in a purchase contract. It allows buyers to back out of the contract if the appraisal is lower than the purchase price without losing their earnest money deposit. The buyer doesn't have to back out, however. Instead, they could pay the difference or ask the seller to lower the purchase price.