Residential real estate in Florida is worth hundreds of thousands of dollars in most cases. Whether the home someone owns in the Sunshine State is their primary residence or is their winter home because they spend their summer months in a different state, the decision to list the property for sale will mean major changes.
Sellers often take their time carefully evaluating offers from prospective buyers, especially when they have multiple offers because their property has drawn a lot of interest. In theory, buyers have an obligation to follow through with the transaction once the sellers accept their offer. In practice, unfortunately, some sales fall apart before the actual document signing occurs. An appraisal gap is one reason why buyers may want to cancel a closing after having a seller accept their offer on a property.
What is an appraisal gap?
An appraisal gap occurs when the professional placing a value on the property determines that it is worth less than the proposed sale price. Changes in the local real estate market and also too much competition for one property increase the likelihood of an appraisal gap. Lenders typically will not finance the full value of the offered amount when there is an appraisal gap, so buyers either need to employ creative solutions or cancel the closing.
Will there be consequences for the buyer?
Sellers who have a real estate transaction fall through at the last minute may end up in a very difficult financial situation. They might have two mortgages to pay or will have to go through the process of relisting the property, arranging viewings and reviewing offers again. The risk of a buyer backing out is a significant concern for many sellers, which is why buyers offer earnest money during residential real estate transactions. That earnest money is a key form of protection for the seller. They can potentially retain those deposited funds if the buyer is the one to cancel the closing.
However, many buyers protect themselves from the loss of their earnest money by including contingencies in the offer that they make. If there is an appraisal gap and the buyer included a financing or appraisal contingency, their earnest money may not be available to compensate the seller. Without those contingencies, the seller may be able to claim some of those funds to offset the losses they suffer because of the canceled transaction.
Seeking legal guidance and learning more about the rules that apply to successful and failed real estate transactions in Florida can help those planning to buy or sell a home better to better protect their interests.