Do you get earnest money back if appraisal is low?
Earnest money gets returned if something goes awry during the appraisal that was predetermined in the contract. This could include an appraisal price that is lower than the sale price, or if there is a significant flaw with the house.
If your appraised value is lower than the agreed upon sales price, you'll have to make up the difference in cash, or cancel the deal.
The purpose of earnest money is to provide the seller with compensation in the event that the buyer backs out of the deal through no fault of the seller and in violation of the agreements in the purchase contract. If that happens, the seller gets to keep the earnest money.
If the purchase agreement contains an appraisal contingency, the buyer is protected in the case of a low appraisal. If the buyer can't get the seller to adjust the price or come up with the difference in cash, they can walk away from the sale with their earnest money deposit returned to them.
If you back out because a contingency in your contract was not met, in most cases, you'll get your earnest money back. Common reasons why buyers might back out of a deal: Their financing fell through. They unexpectedly lost their job.
- Pay the difference in cash between the appraised value and the amount of your offer.
- Walk away, if you have an appraisal contingency in your purchase contract.
- Renegotiate with the seller.
- Request a review of the appraisal if you find inaccuracies.
Can the seller back out if the appraised value is too high? The conditions of the offer contract will determine when the buyer and seller can back out of the purchase. However, the seller may simply want to renegotiate if the appraised value comes back significantly higher than the selling price.
A seller that feels entitled to the deposit or a buyer that feels a refund is deserved will try to get escrow to release the deposit. Escrow cannot release the deposit without instructions signed by both the buyer and seller or a court order from one of the parties.
As mentioned, a contingency in real estate is a condition that must be met before an offer can proceed, and it's kind of like a safety net. Therefore, an appraisal contingency means that if your home doesn't appraise for the amount you've agreed to pay, you can walk away from the deal with your earnest money deposit.
The Agreement provides that when escrow opens a transaction, the earnest money is to be deposited into its trust account, and not released before closing except upon written instructions of the seller and buyer.
Can a seller walk away if the appraisal was too low?
Purchase contracts are legally binding. Unless the seller has a contingency (which is rare), the buyer commits fraud, or the buyer breaches the contract, sellers can't break a contract without consequences.
On average, only one in 10 home appraisals come in low, but this can vary from region to region. If your house ends up in that 10%, here are some potential reasons why.
If the appraisal comes in too low, the seller might sue because the low appraisal stymied the deal. But that's a very hard claim for a seller to make, because who is rightfully using the appraisal? The courts would readily agree that it's not the seller, so most seller suits are very weak.”
Many home-purchase contracts list contingencies, which are conditions that must be met for the deal to close. If one of the contingencies listed in the purchase contract cannot be met and the deal cannot close, the buyer may be entitled to a refund of the earnest money.
While laws vary by state, in general, up until that contract is signed by both parties—even after counteroffers have been sent out—all new offers can be considered and accepted. Once both parties have signed it, however, the seller is pretty much locked into the deal.
Negotiating earnest money can be challenging, but it's not impossible. Both parties need to be willing to compromise and work together to reach an agreement. If the buyer is uncomfortable with the amount of earnest money the seller is requesting, they can negotiate with the seller to reduce the deposit amount.
The appraised opinion of value may be the same or very close to the contract price however, it may also be considerably higher or lower. The job of an appraiser is not to appraise a home based on the sales price or on owners thoughts or needs, but to provide an accurate and supportable unbiased opinion of value.
If they're not responding, or they come back with a not-so-great counteroffer, cut to the chase. Make your maximum offer immediately and put it in writing. Then, if they still don't respond, start looking elsewhere. If the sellers have a change of heart later, they'll know how to find you.
The above issues might seem concerning but, according to Fannie Mae, “the vast majority of appraisals confirm contract price.” In fact, they come back low less than 10% of the time. So, chances are, you won't run into this issue.
If the seller won't budge, the deal typically falls apart. That means the seller must relist and take their chances that the next buyer will offer the same price and that the new buyer's appraisal will come in at value.
Does appraisal gap include down payment?
However, if they are using a loan program with a required down payment amount, the down payment will be based on the appraised value if it's lower than the sales price. Therefore, the buyers have to pay the appraisal gap plus the required down payment at closing.
That means only 1 out of every 10 purchase appraisals comes in below the agreed upon sales price. In other words, a super majority are coming it at or above the purchase price! Though it may smell a bit fishy, it actually makes complete sense…if you understand the appraisal process as explained above.
The earnest money typically goes towards the buyer's down payment or closing costs. It is refunded to the buyer only upon certain contingencies specified in the contract. If the buyer cancels the contract outside of the contingencies, it is released to the seller.
1. EMD: Paid by the buyer to the seller in a property sale. 2. Security deposit: Paid by the tenant to the landlord in a rental agreement.
The Due Diligence Fee is Not Earnest Money.
Due diligence money is non-refundable, whereas earnest money is refundable if the buyer decides not to buy the home within the due diligence period. Earnest money is usually a much larger amount than the due diligence fee.
