Buyers and sellers negotiate the sale terms for a home before entering into a legally binding agreement. Real estate contracts usually state that the sale depends on a home appraisal that meets buyer and lender standards. Appraisal reports sometimes come in with low values and repairs needed to bring the property up to par. A buyer or seller can change his mind after an unfavorable appraisal. The buyer can back out of the deal or renegotiate with the seller.
Purchase loans require appraisals to protect the lender from investing more on a home than it's worth. The lender bases the loan amount on the appraised value, which the appraiser determines by comparing it to similar properties recently sold in the area. Appraisers also identify major health, safety and structural problems that can harm occupants or the home's ability to sell in the future. Although a buyer can renegotiate a contract for reasons other than appraisal problems, appraisal results are a leading cause of transaction fallout and renegotiation.
Real estate contracts contain clauses that allow the buyer to renegotiate after an appraisal. The appraisal contingency basically states that as long as it is conducted within a specified amount of time, an appraisal can make or break the deal. A buyer can waive the appraisal contingency and agree to close regardless of appraisal results, but Realtor.com doesn't recommend it. A loan contingency states that buying the home is contingent on getting a loan, which almost always depends on an appraisal. With both of these conditions in place, the buyer can legally walk away or try to make the deal work.
You may have to renegotiate the sale price after an appraisal. Since lenders finance a maximum amount of the appraised value, a lower-than-expected value reduces the loan amount. The lender requires you to make up the shortfall by increasing your down payment or lower the sale price. The seller has the right to decline a lower price, but may have a hard time finding another buyer who can pay the higher price despite a low appraisal. This point may help a buyer in renegotiating a lower sale price.
Appraisal results often reveal roof leaks, faulty plumbing, electricity or mechanical systems and other serious problems that lower the home's value and make it unsafe. Your lender typically requires all major repairs to be completed before the sale closes. Buyers who are wary of making repairs on a property they don't yet own may request that the seller invest in the repairs. A seller can deny the request for repairs, but may encounter the same problem with other prospective buyers. You might compel a seller to renegotiate repair work by reducing the amount he originally agreed to credit you for closing costs or by eliminating another money-saving seller concession.
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