This can be thrilling to sellers, excited by the possibility of making way more on the sale of the home than they were expecting. But this can also lead sellers straight into a trap if they aren’t careful.
Here is a key point to remember:
A lender will not agree to fund a loan for higher than the appraised value of the property.
Say, for example, your home is listed at $850,000 and you accept an above-asking offer of $925,000 and enter into escrow. If an appraiser determines the home is worth the original list price of $850,000, the lender will not fund the loan for higher than $850,000.
What happens then?
In theory, a buyer could bring additional cash funds to compensate for the difference, but this tends to be an unlikely scenario given this puts a buyer in the “red” from an equity standpoint right at the start and the home would have to appreciate that much more to see any sort of return on the investment.
The seller, then, is faced with the frustrating decision to either agree to lower the price to the appraised value, or they can choose to cancel escrow and return the buyer’s deposit. Not a very fun prospect, to say the least.
It makes the case for why price itself shouldn’t be the sole determining factor when choosing an offer.
How do you avoid falling into the trap before it’s too late?
• Have your listing agent do a thorough market analysis to determine a true realistc list price and keep your expectations here. If you choose that $925,000 offer, be prepared for the possibility that the appraisal could come in for less. If it comes in at, say, $875,000, that’s still a really nice $25,000 more than you were originally expecting.
• If you have multiple offers in hand, look for the ones with a term indicating a buyer will bring additional cash to the table to compensate for the difference between the agreed upon purchase price and the appraised value. An offer of $900,000 may end up being a stronger offer for you if they include this term than the $925,000 offer if they don’t include this term.
• If you feel strongly from the outset that it is unlikely your home will appraise for higher than your list price, if you are multiple countering several offers, look for other ways besides price to pad your bottom line. For example, agreeing to the list price of $850,000 but the buyer pays for the seller’s closing costs. Instead of making additional money going above your list price, you may achieve thousands of dollars in savings instead! It’s just a different way of looking at it.
As you can see, there’s a deeper level of analysis that goes into choosing the right offer. Thinking more outside the box and being creative can lead to a stress-free experience and a happy escrow close that exceeds your expectations and goals.
by Jeremy Howard
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