It’s a red hot seller’s market. Inventory is low and some home buyers are nearing desperation. They are tired of writing offers and not being selected. There are many components of a strong offer other than price. When the price offered is contingent upon the home appraising – the buyer has an “out”. Most buyers write an offer with an appraisal contingency; meaning that if the home does not appraise for the full amount, the buyer can cancel escrow and have their deposit returned. Lenders base their loan amount on a percentage of the appraised value or purchase price, whichever is less.
Example: A Glendale home is listed for $1,000,000
The buyer submits an offer for $1,050,000; their 20% down payment is $210,000
Escrow is opened; unfortunately the home is appraised for just $1,000,000 – the bank will lend the buyer 80% (of the lower amount) or $800,000. In order to obtain financing the buyer needs to increase his down payment by $40,000. OR the seller needs to reduce the purchase price or the two parties can negotiate somewhere in the middle.