When buying or selling a home, two numbers can have a major impact on the transaction: the sales price and the appraised value. Although they may be similar, they represent different things and do not always match.
Understanding the difference can help buyers prepare for financing decisions and help sellers set realistic expectations before closing.
What Is the Sales Price of a Home?
The sales price is the amount the buyer and seller agree to in the purchase contract. It is determined through negotiation and can be influenced by market conditions, competing offers, the home's condition, location, upgrades, seller motivation, and other factors.
In a competitive market, buyers may agree to pay more than recent comparable sales suggest. In a slower market, sellers may accept less than the original listing price. The sales price ultimately reflects what the parties agree to for that particular transaction.
What Is the Appraised Value?
The appraised value is an independent opinion of a property's market value. When a mortgage requires an appraisal, the lender uses the valuation as part of determining whether the property provides sufficient collateral for the loan.
An appraiser may consider the home's size, condition, location, features, and recent comparable property sales. Differences between the subject property and comparable homes can also require adjustments when developing the opinion of value.
Why Can the Sales Price and Appraised Value Be Different?
A buyer and seller negotiate the sales price, while an appraiser develops an independent opinion of market value. Because these numbers are determined differently, they do not have to match.
For example, multiple offers or strong buyer demand could contribute to a sales price above what recent comparable sales support. Property improvements, unusual features, rapidly changing market conditions, or limited comparable sales can also contribute to differences between the contract price and appraisal.
What Happens if the Appraisal Is Higher Than the Sales Price?
A higher appraisal does not usually mean the buyer can automatically borrow more money or use the difference as a substitute for the required down payment.
For example, Fannie Mae generally calculates loan-to-value for a purchase mortgage using the lower of the sales price or current appraised value. If you agree to buy a home for $400,000 and it appraises for $420,000, the $400,000 sales price would generally be the property value used for that calculation.
What Happens if the Appraisal Is Lower Than the Sales Price?
A low appraisal can create a financing issue because the lender may calculate the mortgage using the lower appraised value rather than the higher contract price.
Depending on the purchase agreement and financing, possible options may include renegotiating the sales price, bringing additional cash to closing, requesting a reconsideration of value when there is supporting evidence, or exercising applicable rights under an appraisal or financing contingency.
Buyers should review the appraisal carefully and discuss their options with their lender and real estate professional before making a decision.
Can You Challenge a Low Appraisal?
If you believe an appraisal contains factual errors, overlooks relevant comparable sales, or is otherwise unsupported, ask your lender about its reconsideration of value process.
A strong request should focus on specific evidence, such as incorrect property characteristics, relevant comparable sales that may have been overlooked, or documented improvements. A reconsideration does not guarantee that the appraised value will change.
What Should Buyers and Sellers Do Before the Appraisal?
Buyers should understand how an appraisal contingency or financing contingency works before signing a purchase agreement. Contract terms determine what options may be available if the appraisal comes in below the agreed price.
Sellers can work with their real estate professional to review recent comparable sales and establish a listing price supported by the local market. Significant improvements and relevant property information should also be accurately documented.
Understand the Numbers Before You Close
The sales price tells you what the buyer and seller agreed to, while the appraised value represents an independent opinion of market value. When financing a home, the difference between those numbers can affect the mortgage, required cash, and negotiations before closing.
Loan Wolf Lending can help Florida homebuyers understand how an appraisal may affect their mortgage financing and what options may be available when the sales price and appraised value do not match. Call 754-755-3075 to discuss your homebuying plans.