When a property appraises for less than the purchase price, it can complicate the transaction. Appraisals are trusted by lenders to best reflect the market value of the property. Therefore, the lender may not extend their lending to cover the amount that exceeds the appraised value. In which case, the buyer can walk away because the financing contingency cannot be met, or add cash to rescue the transaction.
In a seller’s market, values can rise quickly. Beyond everything, it is the market that determines the value. In such a case, even the appraisal may not appropriately determine the value of the property. The buyer may not have an alternative property to choose from, and timing of the purchase may be foremost in the buyer’s mind.
For fortunate buyers, who have the means to add cash to their transaction if the appraisal is short of the contracted purchase price, the solution may be to add the cash. However, for those who have a budget constraint, it can be a disappointment to learn that the lender will not finance the purchase due to the appraised value being less than the contractual purchase price.
Sellers also, are disappointed, if the transaction does not complete due to a financing constraint and an appraisal that does not reach the agreed upon price.
Avoiding such surprises is a challenge, when market values rise quickly. Seller’s can require bigger cash-to-finance ratio under such circumstances. Buyers may also avoid a disappointment by reserving cash aside for such an outcome.