When the appraisal comes in higher than the offer, it’s great for the buyer. You can feel satisfied knowing that you’re getting a solid deal on your home. But is there a chance the seller will back out? It’s very rare for a seller to back out of the deal on their home due to the appraisal being higher than the offer because the seller doesn’t typically see the appraisal—it’s just between the buyer and their lender.
That said, there are some situations where a seller might see the appraisal and back out of the sale if that was included as a contingency. Let’s look at how the appraisal process impacts the closing process and what your rights are should a seller try to withdraw from the sale.
What if the appraisal is higher than the offer?
An appraisal being higher than an offer generally shouldn’t lead to the purchase agreement being canceled. There are two reasons for this:
- The seller doesn’t usually see the appraisal. The appraisal is typically conducted by the buyer’s mortgage provider and paid for by the buyer. As a result, the seller doesn’t typically have a right to see the appraisal report because the appraiser is working for the buyer’s lender, not the seller.
- The lender would also have no reason to share the report with the seller since a high appraisal actually decreases the risks for the lender. For example, if the buyer were to eventually default on their mortgage, the lender is more likely to get their money back. That’s because the appraised value of the property is worth more than the mortgage.
- The only exception to this rule is if the seller requires a copy of the appraisal report as part of the purchase agreement. However, even if the seller does see the appraisal report, that doesn’t necessarily mean they can back out of the deal.
- The seller is bound by the contract. Generally, the appraisal report doesn’t change the fact that you and the buyer already have a contract to sell the property at a certain price point. Just because the appraisal shows the seller may have underpriced their property, they don’t have the right to walk away from the deal. If they do, they potentially open themselves up to being sued for breach of contract.
- Again, the exception is if there’s an addendum or contingency in the contract that allows the seller to cancel the contract based on the appraisal report.
- Talk to a real estate attorney if the seller is trying to back out of a contract without due cause.
When can a seller back out of a sale?
The good news for buyers is that it’s usually difficult for sellers to call off a sale, even if an appraisal comes in higher than expected. Generally, the seller can only back out for the following reasons, most of which have nothing to do with appraisals.
Prior to the contract being signed
If the contract hasn’t yet been signed, the seller is under no legal obligation to sell. Simply having a verbal agreement to buy the property at a certain price doesn’t make the deal legally enforceable. Until the contract has been signed, the seller has the right to back out.
During the contract’s attorney review period
Most standard real estate contracts include a five-day attorney-review period. This provision permits the buyer’s and seller’s attorneys to cancel the contract for any reason, allowing either party to pull out of the deal with no consequences.
Addendums can let the seller back out if appraisal is high
Some contract contingencies give sellers and buyers the right to cancel the deal after it’s been signed. These contingencies can give the seller rights related to the appraisal, such as the right to get a copy of the appraisal report and to cancel the deal based on the appraised value.
Also, loan contingencies allow a seller to move forward with other buyers if the buyer can’t get a mortgage within a certain time period.
Addendums and contingencies provide sellers with the most potential leeway for reneging on a deal due to an appraisal. When signing a purchase agreement, review the contingencies to determine if the seller can cancel the deal should the appraisal come in higher than anticipated.
The seller is unwilling to make repairs that the buyer requests
Buyers may ask the sellers to make repairs to the property based on the results of a home inspection. A seller who is unable or unwilling to make the changes is under no obligation to complete them. As a result, the contract may be canceled if the buyer is also unwilling to complete the purchase without the requested repairs.
Home appraisal vs. home inspection: Knowing the difference
A home appraisal is an expert’s opinion on the value of the property. An appraiser uses their training, education, and experience to determine if the home’s value is close to the agreed-upon sale price. While a seller is free to buy their own appraisal report, it’s usually paid for by the buyer’s mortgage provider.
A home inspection identifies potential and existing issues with the property. Home inspectors survey properties looking for mold, plumbing, electrical, and foundation issues. Unlike an appraisal, a home inspection doesn’t have anything to do with a home’s value.
What the home appraisal process means for buyers and sellers
For buyers, the home appraisal determines the amount that a lender would be comfortable loaning to them. Lenders make loans based on the loan-to-value ratio. If a home appraisal is lower than the sale price, the lender will give the buyer less money or may deny the mortgage entirely.
A home that appraises for higher than the purchase price is a benefit to buyers and their mortgage provider as it means instant equity. That higher equity can also potentially affect your private mortgage insurance (PMI) requirements. Usually, if your down payment is below 20%, you have to pay PMI of about 1% until your mortgage balance is below 78-80% of your home’s value.
As one Reddit user says in response to a buyer getting a higher appraisal than the purchase price, “If you’re doing conventional and not putting 20% down, keep an eye on your home’s value as it would help you get your PMI off earlier, as long as your home’s value doesn’t crash. If you think this might apply to you, talk to your lender about it.”
Again, a home appraisal’s impact on sellers should be minimal given that sellers typically don’t see the appraisal report. Even if they do, a high appraisal doesn’t give them the right to cancel the sale unless a contingency in the agreement says otherwise.
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