So you have listed your home for sale or you put a home under contract to buy but the appraisal came back short of the sales price. What do you do now? Well there are several different scenarios that could go down and I'll explain them here as they relate to TN real estate.
But first a word on appraisers. back in the day a mortgage broker or loan officer could and did order the appraisal from a lenders approved list of appraisers. They might choose a particular appraiser over another because of their area of expertise within the geographical area. Middle Tennessee is a large area and an appraiser that generally works the Brentwood area for example may not be as articulate in the 12 South area in Nashville. As such, the loan officer would more than likely order the appraisal from an appraiser they knew had a good working knowledge of the area where the home under contract (subject property) was located. Now then, fast forward to today where because of the recent changes to the HVCC (Home Valuation Code of Conduct) through Fannie Mae, mortgage brokers and loan officers can no longer order the appraisal directly. The order comes from the lender who may be out of California or New Hampshire or some other far away state, NOT Nashville TN, and is picking from a hat, so to speak, the appraiser to do the job. If an "approved" appraiser who may not be familiar AT ALL with the area is chosen out of that proverbial hat, you can see where an appraisal may not get the most accurate assessment. What happens next? Well for starters:
1. In Tennessee according to the Tennessee Association of Realtors Purchase and Sale Agreement, if the appraised value does not meet or exceed the sales price the buyer can at their discretion simply terminate the contract and get their earnest money back. .......But what if you (as the buyer) REALLY want the house? Then,
2. The buyer's agent and seller's agent do a comparative market analysis and provide to the loan officer additional comparables in support of the sales price in hopes that the lender will review them and ask for a review by the appraiser to adjust the appraised value. AND/OR the buyer, depending on the lender they use, may have an option to pay the difference between the appraised value and the agreed upon purchase price and continue on with the contract. Believe it or not, this happens more frequently than you might think because of what I like to call "botched" appraisals. Meaning we got a bad appraisal (see the first paragraph) and the lender was not willing to re-valuate.
3. The buyer and seller go back to the drawing board and re-negotiate the terms of the contract so that the sales price meets the appraised value. For example, let's say the seller included $5,000 of the buyer's closing costs in the purchase and sale agreement, but the appraised value was $5000 less than the sales price. The buyer and seller could agree that the seller would not pay any of the buyer's closing costs and lower the sales price to the appraised value and it becomes a wash. There are many other ways a buyer and seller could re-negotiate, but that's a start. If all else fails as the buyer, revert back to # 1. and termite the contract, get your earnest money back and get back out there and find another home to buy!