If you are thinking about buying a house, a home, a condo, twin single, duplex or investment property. 

118. No. In theory the amount offered should have nothing to do with the appraised value. The appraisal is the common way banks, lenders and mortgage companies determine if the amount offered is fair, reasonable, and in line with what another unrelated party would pay for the same property.

If you buy a gallon of milk at your store every week for $3.99 and a friend asks you to lend them $5 to buy a gallon. What would you think? Why do you need $5 to buy a $3.99 item? $4 makes sense.

But then your friend explains they buy natural almond milk, and that's mormally $4.99. Now that you know more maybe it makes sense to lend the $5 now that you know it's the fair price for the product. 

In this case I'm suggesting you appraised the proposed transaction and decided you would lend the $5 after understanding that the friend was paying a fair price for the product - and not scamming you out of a $1. A silly example but similar to what lenders are trying to do by using appraisals.

119. Unless there is language added into the contract - the offer can be considered null, void, or terminated. This could be different in markets across the US. In general, the basic premise is the offered price must meet, or exceed the appraised value. (Question 122 also addresses this issue)

Additional factors to keep in mind. Anything less than the appraised price is low. Whether it is $1 or $100,000 dollars. So it doesn't matter per the contract the amount, the appraised value came in low. The contract typically does not contain an appraisal grading scale. Less than the purchase price is LOW. 

Example: if the appraisal came in $100 lower than the contract. From a practical point of view this might seem tolerable. However, from the legal point of view: $100 low is no different than the $10,000 low. Unless the contract, purchase agreement says otherwise, the agreement can be terminated due to the low appraisal. 

In my opinion: this is one of the most powerful protections in contract to protect buyers. It should be a buyer's linchpin, or a critical support to your offer and opinion of value. 

Besides terminating, there are many variations to how this can be handled. One is to look at the comps used in the appraisal and make sure they are fair. Accurate. Current. If not and better comps are clearly available; a buyer, through their lender and agent, can challenge a low appraisal. These are hard to challenge and win unless there were some clearly bad comps used. Many lenders are reluctant to take this step. It takes local knowledge, plus courage to challenge the appraisal.  

Example 2: in circumstances where the contract already had the seller paying $5,000 toward the buyer's closing costs, and the appraisal came in $4,000 low. Sellers often want the buyer to accept the lower purchase price and receive $4,000 less in closing cost help. (no seller dollar impact)

If this is acceptable to the buyer, it's a possible solution. My advice, if you're my buyer, is to make the seller accept the lower purchase price and also pay the buyer closing costs as well. 

Lastly there are a myriad of other outcomes. I've had buyers pay for a new appraisal in hopes of getting a more fair, or accurate value. I've also had buyers switch lenders - assuming the seller is willing to provide more time and extend the close date.  These are just a few of the possible variations.

  120.  Does a low appraisal automatically terminate the agreement or purchase contract?

120. Unless the contract states otherwise, the appraised value must at least meet, or exceed, the contract price. If the appraised value is lower, the standard purchase contract allows the offer to be terminated. Another good point to be aware of is lower is NOT defined by an amount your local contract to verify. 

121. Another great question. This is a key reason I say: Know the Numbers. I would say most buyers likely have no idea whether this could be an issue. On the next level: I would say many real estate agents might not have a good grasp of the probability either.  Even your lender is not likely to know this ahead of time.

This is where (the Bishop opinion) having more information. More facts. More stats. More data can be super helpful. If you know what the house sold for across the street last week - is that helpful? Yes. If you know what the last three sold for last month in neighborhood (we'll say these are all good comps) is that helpful? Yes - 4 recent sales.

If you know what the last 12 sold for over the past 3 months - does that help? Sure. The more information you have - the higher the probability of being able to more accurately predict if your purchase or sale is likely to appraise.

The more you know (not guess) the better odds that you will be right, or correct. Notice it's still just odds, but the higher the total number of sales reviewed - the more likely you are to predict accurately. 

122.  What happens when the appraised value comes back for more than the price on the purchase contract?

122. Ahh, a great question! And one that actually is a positive for the buyer.

If the offer is for $100,000 and the appraisal comes back at $102,500. What happens? Nothing! The contract is unchanged. The offer written and accepted was $100,000 and the purchase price does not change because it appraised for more money. On paper, the buyer has knowledge that it is likely that they just purchased the property at a nice discount.

If you read a few of the other questions on appraisals, you'll likely pick up on the fact that appraisals are just estimates. Yes they are professional estimates, but the key word is always estimate. Approximate. Hypothetical. The real world facts are things, property, houses are worth what the buyer is willing to pay. Appraisals are the lender way to get a good idea if it's statistically within reason. A fair market value. 

On paper I consider it a huge win when appraisals come back HIGHER than the purchase price. I cannot find any statistics on the subject. But from talking to lenders it seems there are not a lot that come back higher than the contract. 

More often it is the opposite - there is a higher probability of a short appraisal. On the whole it seems about 970 of 1,000 appraisals are for the contract price. I'll guess 25 are short (less than the purchase price) and 5 are above the purchase price.  

In summary- appraisals over the contract price are infrequent, and clearly suggest a victory for the buyer.

123. If the property appraises over the contract price - are there other ways a buyer can benefit from the higher appraised value? 

123. First point is congratulations. At least from the lender, or bank's point of view you have made a great purchase. Not a lot of properties have the appraised value exceed the purchase contract.  It's a sign that you've bought a property with instant equity!

Now, what can you do if anything? One thing is you can adjust the purchase price and get more seller help. Subject to whether you can get the seller to agree. 

Here is a real life example with a one of my buyers: a home was listed for $379,900 and my clients loved it. When I did my detailed sales analysis overtop the property, I thought the fair value was $410,000. Meaning if it was my listing. Based on these sales of other properties. Nearby. Comparables that was where I would have suggested a seller to list. 

The offer made was $183,000 with $3,000 in seller closing costs. Both parties agreed. When the appraisal came back at $400,000 we bumped the purchase price to $385,000 and asked the seller to now pay $5,000 in closing costs. It was the same approximate net to the seller.  The seller agreed because we could state the property met that value. (obviously the appraised value was $400,000 but I recommend a buyer never disclose these appraisal wins at least until the after the property is closed). 

An interesting footnote to the story here is the seller was a licensed real estate agent. I was very happy for my buyers. Effectively buying the property at $385,000 and knowing the appraised value was $15,000 higher. Plus they kept an additional $5,000 in their pockets because the seller paid that much toward their closing costs.

It's my opinion that the deeper dive process I utilize is more likely to identify properties which are undervalued. Or at least look statistically more probable to appraise higher. 

SInce 2020 I have had about 30 buyers close on properties where the appraised value exceeded the contract purchase price.  Out of roughly 150 buyer transactions. 

"Know the Numbers!"

124. An appraisal gap is financial incentive, offered by a buyer, to pay a certain amount of money if the lender's appraised value is less than the contract price offered. An example might be: a home listed for sale at $399,900.  A buyer offers $406,000 in an effort for the seller to take, or select, their offer vs others - theoretically for less money.

For the example we'll say the buyer is offering $6,100 of appraisal gap coverage. $406,000 -$6,100= $399,900. So in the example the buyer would be responsible to cover any or all the difference between the list price and the actual appraised value the lender gets reported back. If the property appraises for $406,000 or higher; the buyer has no added appraisal gap liability. If the property appraises for $405,000. The buyer would be responsible for the $1,000 shortfall on the appraisal. 

125.  An appraisal gap, when used, is a donation to the seller for the amount dollars offered by the buyer to cover a difference between the listed price and the contract price. It is used most often when a buyer offers more than the list price but that is not a required term - just the one where it is most often used.

The offered appraisal gap is effectively a donation of funds to the seller. Are you in favor of people donating $1,000's and $1,000's of dollars to you? Of course! Who wouldn't be. Does it make financial sense to make donations to sellers? Some will answer yes because their desire to get a home. Or maybe a certain home, or school district is so strong . They are willing to hand over their own hard earned cash and savings. I am NOT a fan of appraisal gaps - a=t least not in favor of gaps where clients are in effect making donations to sellers. I believe the mission can be accomplished without donating to the seller. 

A key point to remember, is appraisals are done by lenders, banks, mortgage companies as a means of determining if the property is actually worth the amount a buyer is offering to pay. 

But while appraisals are based off other sales, of largely similar properties. It's still subject to a significant amount of variations in terms of what value the appraiser determines. If a newer home (<5 years old) is compared to a home 30 years older. Is this a good comp? Or comparable to use? It may not be. If the home being purchased is 1,500 square feet and a comp, or comparable sale property is 2,600 square feet - is this a good comp? 

Here is a real example of how varied comps can be, from a buyer transaction I handled. A home was listed for sale at $250,000. My own comps suggested it was worth $280,000 to $295,000. My buyer offered $272,000. But offer to purchase "as-is" meaning no repairs would be requested (as the house was in very good condition). The first appraisal came back at $247,000. Less than the listed price and far below the offered price. But among the comps were a modular home compared to a stick built home. And poor condition comps that were not even recent sales. So the appraisal was challenged. A new appraisal was done and the value came back at $272,000 - the list price. 

During the process the lender asked the buyer for the inspection and the inspection report was shared. When the lender's underwriter viewed the inspection they stipulated a few items needed to be repaired by the seller. But this contract was written and accepted "as-is" meaning the seller was not asked, nor expected to make repairs. 

Because of the impasse, the buyer opted to switch to another lender to still hope to make the purchase. The seller granted a little extra time. A new loan application was made and a third appraisal was ordered on the same home. So in a matter of 2-3 weeks the home was appraised three times. 

The third appraisal came back at $280,000 which was closer to my own estimate before the offer was made. The home closed and it ends with a very happy buyer. 

So a quick review: a home listed for for $250,000 appraised at $245,000; $272,000 and $280,000 in three separate appraisals done in about 2-3 weeks time. 

My own theory is to look at the past 1, 2 or three years. Also look closest at the last 2-4 months sales. Of largely similar closings and see how the subject property to be bought or sold compares. This will typically generate 50-150 total sales and 10-20 recent sales. 

More information. More data. More facts. All that evens more knowledge and greater confidence in the where true market value lies. 

126. The key point to remember, if you are the buyer. If you offer an appraisal gap. You are stating to the seller: if the property appraises for less than my offer, I will pay this gap amount out of my pocket.

You are stating: you will close on the purchase even if the lender's appraisal is less than the amount you have offered to pay (within the limits you've set in the contract). Meaning, you'll still get the mortgage, and close. Up to a certain dollar amount (the appraisal gap offered). 

The concept as a buyer is you are attempting to give the seller assurance that if the appraisal is lower than the contract price - you (from your own funds) will cover that difference. 

As an agent who works mostly with buyers here are my thoughts on whether appraisal gaps are "smart" for buyers. If I said: I'll give you twenty dollars and I need you to give me change - how may times would you agree if the change you gave me for my twenty dollars was three fives? (3 - $5's). I'll guess you'll continue to give me 3 $5's for as long as I continue you to cough up the $20. Why wouldn't you? Each exchange is a profit to you. If no reason other than my own stupidity. 

Now if we reverse the example, and you're handing me $20's and I'm handing you back three $5's; how long can you do that? Because I'll do it all day long. 

This is why I'm generally opposed to appraisal gaps if you are my buyer.

But, and there are often "buts" -  there are circumstances where my clients have used appraisal gaps as part of their offer. Had their offer accepted - but the appraisal came back at valuations where the gap was not needed because the home appraised at the contract value, and in a few instances - the appraisal was over the offer amount accepted by the seller. 

So in summary, I have no objections to buyers offering appraisal gaps when the gap dollars are not used. Otherwise, you're doing the 3-$5's for a $20 loss trade. 

So this is a huge reason I use the term "Know the Numbers" as part of my business slogan. Be smart. Know what the true value is likely to be. 

127.  This is a great question, but can be a complex answer.

There a number of different costs, fees and expenses that get lumped into closing costs. There are occasional exceptions, but if one lender has a much lower rate, then the odds are they have much higher, fees, origination costs, discount points and other fees and expenses - which is how they can offer a lower mortgage rate. Generally.  

EXAMPLE: Is your home owners insurance policy a part of your estimated closing costs? Yes. Is it collected by the lender or title company handling your closing - typically no. (check with your lender) In most cases you select your insurance provider. They discuss your coverage options and costs. Usually you will pre-pay, either direct to your insurance company or to the lender - the 1st year's policy cost upfront. So if your policy is $1,800 for the 1st year, you'll pre-pay, and it's part of your closing costs, but it may be the buyer directly making the 1st year payment upfront. When paid direct to the insurance company, you'll need payment documentation and proof of coverage to the lender and title.  

So this is one example of how your closing costs are just an estimate until you get through the entire process. Here is a list from a recent closing (Aug '24): Home owners insurance; Loan discount fee; Appraisal fee; Credit report fee; Daily interest charges to end of the month; ID verification; Life of loan fee; processing fee; Tax service fee; County property taxes (5 months); Hazard insurance reserves (3 months); Endorsement to title; Endorsement to title; Endorsement mechanics lien; Endorsement survey; Insured closing protection letter; Lender coverage; Settlement/closing fee; Title insurance binder; County conveyance fee; Recording fees for deed; Recording fees for mortgage; Survey.

These are from a closing statement and the costs ranged from $0.50 to $1,784. A trick used in the early stages by shady lenders (my opinion) is they tell you our fees are super low. But is it inclusive of all fees? If they seem to be touting lower rates than other lenders - are they quoting discounted rates that include a buy down? I'd would tell you a buydown is a fee, but they may not count that the same way. Likely, this is how they can offer the lower rate- then there are "points." Which is a lender term for a fee but with a different name. 

Because this is such an important part of a home purchase, I recommend you target a local lender who can meet with face-to-face. Ideally they process and underwrite the loans locally as well. It's not required but it can be helpful when questions or problems arise through the process. 

My own experience is the best lenders over state the fees. Meaning they are the highest possible am ounts getting quoted and then come in with much lower final numbers needed to close. 

If you're told you may need $11,000 to close, but you end up needing $7,800? Is that better than being told you need $6,000 to close but you end up needing $7,800?

128.  Make sure you compare rates on the same day. When you apply for a mortgage with multiple lenders, you're able to compare, NOT just their rates, but also all the other fees, and expenses. Doing this can potentially save you hundreds and even thousands of dollars . Here are a few suggestions:

1). Apply on a single day. Since mortgage rates change daily, it's the best way to see who is offering  the best rate for your circumstances.

2). Apply for the same type of loan. Interest rates can vary by loan type, for the same loan type and term (30 year) with each lender. Don't apply for FHA with lender A,  and conventional with lender B. You want an apples-to-apples comparison.  

                         
3). Compare points. One lender might charge you mortgage points for the same interest rate that another lender will give you without points. Check the first section of your loan estimate for this cost. This is where many borrowers get led astray. If the typical rate is 7% and a lender is offering 6.625% it almost always is a rate with points (and points are effectively interest you pre-pay to get a lower rate).

4). Don't allow the rate to be the only factor. You have to look at the final OOP - or Out of Pocket costs for your loan.  All of these loan fees can vary by hundreds or thousands of dollars.  If you think, hope, or expect to move or refinance in a few years; it's generally best to keep fees and extra costs to a minimum.

129.  An awesome question. Buying a home is an expensive endeavour so it should be no surprise that selling a home is equally, if not more, expensive. First I'd say no seller wants to pay the buyer's closing costs. It's a reduction in the price to a seller, so sellers typically hate paying their buyers fees and closing costs expenses. So if sellers hate it; naturally it's a good thing for buyers!

If you look at question 125, above: closing costs are a huge hurdle and expense for buyers. Seller can pay money toward the buyers financing, closing costs and expenses associated with completing the transaction. There are limits and they vary based on the loan progeram a buyer uses and also the amount of their down payment effects how much a seller can contribute. Here are some of the limits:

Conventional <10% down payment = 3% maximum seller contribution to buyer loan fees; Conventional buyer DP: 10%- 25%= 6% max seller contribution; Conventional 25%+ DP = 9% max seller contribution.  

FHA , Seller max contribution is 6% of purchase price or appraised value - which ever is lower.  

VA, or Veterans Administration loan, 4% is the maximum seller contribution.  

USDA maximum seller contribution is 6%. 

130.  Good question. Unfortunately for buyers, the answer is no. But the good news is there really should be no circumstances where that will happen. If the loan fees, and expenses have not consumed the seller credit; a buyer should be able to pay points up to a point where all the seller credits are used.

131.  Yes to the first part, but there are limits top the maximum contributions. See # 126 above. 

132. You must ask for them is the simple answer. They are included as a term, or condition of your offer to purchase. 

As a veteran real estate salesperson, it's my belief that many agents don't understand how to do this. Another portion of them are afraid to do this. Their fear is often two-fold. One is the fear of getting it written properly into the offer, and the other fear is the request for closing costs will make the offer less attractive and reduce the odds of contract acceptance. 

I'd say those are legit concerns on both fears. I have done this 100's of times. Part of the key to success is knowing when to use such terms in offers presented.

If there are more than two offers I will agree that including seller paid closing costs for a buyer "may" make the offer less attractive. May, but not always. 

133.  Yes. On Conventional loans it varies from 3% to 9% depending on the down payment percentage. On VA loans it is capped at 4%; on FHA loans the limit is 6%; on USDA loans the limits are 6%. See #128 above. 

134.  First possible answer is: yes. You may be responsible for the buyer broker commission for representation.

The second possible answer is: maybe. Meaning you may be responsible for some part, or portion of the buyer broker agent fee.

The next possible answer (hopefully) is: no. The buyer will not pay the buyer brokerage fee;  the seller may (& most likely will) pay this fee.

This change is the result of a lawsuit filed in 2019, but recently settled.  In the case known as Sitzer/Burnett. Class action plaintiffs based in Missouri, who paid commissions of 5.5% on earlier transactions, accused Anywhere Real Estate, HomeServices of America, Keller Williams and NAR of conspiring to require sellers to pay inflated commissions. 

As a real estate agent who works predominantly with buyers; it is my hope, plans, expectations that my buyer clients will always be in this third option. I  feel, or believe the agent representing you should ALWAYS be looking for the best outcome. It's my belief the seller paying all the fee is the best outcome. But it is too early to know, but hopefully by the first quarter of 2025, I will have a better understanding after several closing in this new era of "who pays for the buyer broker!" 

 135.