When someone is buying a home and they’re going to use financing in the form of a mortgage, they need an appraisal to cement the deal. Before a bank is going to extend credit, they want to make sure they’re not giving someone a loan that’s more than the fair market value of the house.
That’s where an appraiser will enter the scene. An appraiser will give their unbiased opinion on the value of the home.
If the appraisal is less than what your offer is, then you may feel frustrated and even a little devastated.
This isn’t an uncommon situation, however. One of the big reasons for contingency issues is the appraisal.
An appraisal goes over the condition of a property, and they have to be certified in the state where they’re working. Appraisers look at a wide variety of features like the year the home was built, zoning details for the neighborhood, construction details like the type of foundation, and the utilities and amenities.
An appraiser will come up with a report for the lender in around a week or so, but for VA and FHA loans, the appraisal report can take longer to finish because it has to be more detailed.
There are a lot of reasons an appraisal can come in low. A lack of comps can be one reason. For example, the market might be moving faster than appraisers, so home values in a hot market could be going up rapidly, but appraisals might not be matching that pace. There’s also an issue if for example there have been a lot of remodels in a neighborhood to bring the overall value of the comps up.
So what if your appraisal comes in low? What can you do?
Cover the Difference in Cash
If you’re worried a pending sale won’t go through, both a buyer and a seller have options.
The buyer might be able to make up for the difference in the appraised value and the sale price using cash.
The reason a lender even cares about the appraisal value is that it impacts the loan-to-value ratio.
In some instances, a lender won’t let a buyer make up the difference in cash, so there could be another option here which is a buyer covering some of the closing costs on the seller’s end.
The simplest solution, when possible, is to reduce the price if it was priced too high. The lender will be happy, and so will the buyer and then the deal can go through. You have to think that if you let one buyer walk away over the issue, that there’s certainly a high likelihood the next buyer’s lender could have the same issue.
Dispute the Appraisal
You don’t have to accept an initial appraisal. That doesn’t mean that your lender won’t go with the first one, but it’s worth a shot to dispute it or to ask for a second one.
You should always ask for a copy of the appraisal report as a seller, so you can go over it and make sure there are no glaring mistakes.
Only a lender can technically demand another appraisal, and they may or may do that, but it’s worth trying.
You can ask the real estate agents who are working on the deal to create a list of comps that would highlight the justification for the sale price that’s been agreed on. Once that’s compiled, you can give it to an underwriter and ask them to review the appraisal.
Finally, aside from flat-out canceling the transaction, you might be able to negotiate and come to an agreed-upon middle point. For example, a seller might agree to pay some of the difference between the sale price and the appraisal.
There are options, but you have to find what’s going to work for you, and if you’re working with a good agent, they should be able to help you find a solution if an appraisal comes in low.