My appraisal came in low! What do I do now?
Seth Lejune addresses what you do next after your home appraisal comes in low.
You’ve gotten the home under contract, you’ve negotiated inspections, you’ve starting to call movers and plan for your next phase when all of a sudden a terrible wrench is thrown into your transaction that causes heart palpitations: “The appraisal came in low.”
To everyone out there who just read that last sentence and thinks to themselves, “So What?” allow me to explain this as simply as I can: When going under contract for the sale of the home, there is a portion in the agreement of sale where it defines the terms of the loan. Usually this is called a mortgage contingency and buried within that is ANOTHER contingency; an appraisal contingency.
What this does is ensure the lender is lending the appropriate amount of money on the property. In other words, ensuring the lender is getting its money’s worth. The minute this low appraisal comes to light, the buyer and seller are what they call “out of contract,” meaning that both parties are not in compliance and can no longer settle.
The following are the most common outcomes from this dreaded scenario and how to keep the deal alive:
NO. 1» Desk Review: As soon as you get a low appraisal, everyone should request a copy of the report for review. The appraisal itself uses what are called “comps,” which are similar properties that have sold in the recent past. In some cases, the agents can find other suitable comps the appraiser might have missed and agents/lenders point these out, but generally are not very receptive to changing their report after its submission. The fact is appraisers do this all day for a living and more than likely they’re right and you’re wrong, but a strong lender and agent can jump up and down enough on an appraiser to save the buyers a little money or better yet, save the deal entirely. Rarely, there is a blatant miss by an appraiser, but it can happen. NO. 2» Seller Drops the Price: No seller wishes to do this but the truth is that a low appraisal is usually not low at all. In the current market, sellers have the upper hand when it comes to getting what they want from buyers going into contract but a low appraisal is one of the rare moments where the power dynamic is flipped. After all, if the buyer can’t get financing then they can usually walk away and get their deposit monies.
NO. 3» Buyer Brings More
Money: If the seller has entertained multiple offers and selected yours, they can hold firm and ask the buyer to come up with the difference. Sometimes this is not an option since people are stretched thin getting into houses as it is. (no extra cash) Also, some just have a principled objection to overpaying for a home. If the seller is really dead set on getting their price, they can boot the buyer and go to another buyer who lost out. The only catch is the new buyer would then be forced to get another appraisal which runs the risk of getting an even lower value.
NO. 4» Buyer & Seller Meet in the Middle: In this case a compromise is reached and everyone shares the pain a little bit. This isn’t as common as you might think, since most buyers and sellers will leverage their advantage accordingly. For example, if a buyer is under contract on a house that had been on the market for quite some time and senses weakness in the seller, they may threaten to walk. This would in turn force the seller to reconsider their position. Poker anyone? NO. 5» New Lender: In even rarer circumstances, you can actually get a new appraisal performed, but this would force the buyer to switch lenders which means more credit checks, due diligence and paperwork. Like in option No. 3, there is a chance that the appraisal could come in even lower than the previous one. Theoretically, you could keep getting new appraisals (for conventional loans) until you got the value, but the buyer would fork out roughly $400 for each one.
NO. 6 » Loan Restructure: In certain circumstances, there are ways to revamp the loan to make it work, but the appraisal amount usually is not changeable. Therefore, a work-around needs to be had and it usually means borrowing a little less and then freeing up cash to overpay for the property. You read that right — buyers sometimes have to overpay for the property in a robust seller’s market like this. Sellers have got the goods and buyers know it.
It’s worth noting that low appraisals are not total deal killers. It’s bound to happen every once in a while, but having skilled and experienced real estate professionals are key to navigating the potentially choppy waters.
Seth Lejeune has always been a real estate junkie. In addition, he has a love for helping people with their problems. While some problems are worse than others, every transaction at its core is a client needing something resolved. A sold home, finding the perfect home or something as simple as a contractor referral, it is this process that gets Seth out of bed every morning. Seth is a