What Happens When A Property Appraisal Comes In Below The Contract Price In Texas

Dated: 09/28/2017

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In a Texas real estate transaction involving third party financing, ie. a loan, lender approval is required for the deal to close.  That approval is broken down into two parts.  The buyer must obtain approval for the loan based on their finances, credit, income etc. and the property must also be approved.  Physical conditions within the home may cause the property to become ineligible for funding, or the home may not appraise at the value agreed upon in the contract.  For the purpose of this post, I am focusing on the latter: what happens when a home doesn’t appraise.

 

If an appraisal comes in at a lower value than the agreed upon contract price, there are a few options for how the parties to the contract can handle this scenario. In order to illustrate these scenarios, let’s say that the Johnsons are selling their home to the Smiths.  They have agreed to a purchase price of $360,000; however, the home only appraised for $340,000.

 

The first option is that the sellers and buyers can agree to drop the contract sales price to the appraised value.  However, the Johnsons may not want to just drop the price to $340,000.  After all, they accepted the Smiths offer in a multiple offer situation, and they turned down a $350,000 cash offer.  So, let’s say the Johnsons do not agree to reduce the sales price to $340,000. 

 

This brings us to scenario number two; the Johnsons propose that the Smiths bring $20,000 cash to the table in order to close the deal at the agreed upon $360,000 sales price.  If the Smiths are capable of coming up with an additional $20,000 cash to put down on the property, this solution could work. However, the Smiths are not obligated to agree to this scenario even if they are financially capable of it. 

 

Let’s say the Smiths only have an additional $10,000 they could put towards the home. The Smiths could propose that they put an additional $10,000 down, and that the sales price is reduced to $350,000.  If the Johnsons approve, this scenario would also allow for the transaction to close. 

 

If the Smiths and the Johnsons cannot come to an agreement, the deal will fall through and the earnest money will be returned to the Smiths.    The third party financing addendum used in Texas real estate transactions is very clear on this.  However, there is one other option for the Johnsons and Smiths in this situation.  They could appeal the initial appraisal, or request a new appraisal.  It would be prudent for the Johnsons to make sure that the Smiths would still pay the agreed upon contract price of $360,000 if a new appraisal deems the property to be worth that amount.  Many buyers are inclined to not pay more than the appraisal amount, and in Texas, they are protected from doing so unless they want to bring the extra cash to the table.

 

This post originally appeared on shesellsaustin.com

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Erika Albert

Erika Rae Albert is an Austin native who has built her business around one guiding principle, YOU always come first. Prior to joining the real estate industry, she honed her her customer service s....

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