What Happens When the Appraisal Comes in Low?

One of the most stressful situations for buyers and sellers is when after negotiating price, and then inspection items, the appraisal comes in low.  The appraisal is when the bank sends out an independent appraiser to ensure the home being purchased is worth what is being paid for it.  And in today’s real estate market when homes are listed at market price (the price other homes like it have sold for) but buyers must pay $10,000 or more above that asking price to win the home in a multiple offer situation, it just makes for a situation where appraisers are going to have a tough time justifying value.

So, what do you do when the appraisal comes in low?  Well most purchase agreements are contingent on an appraisal in some form.  Either through the financing contingency or separate clause, if the home doesn’t appraise to purchase price or above the purchase of that home can be cancelled by the buyer and they get their earnest money back.  So if both parties don’t want to start from scratch again, it’s best to negotiate a solution.  Here are some common courses of action/negotiations that take place.

Ask for a new Appraisal:

Depending on the lender this may or may not be an option.  And of course, you will need to negotiate who pays for another appraisal.  Many times, this second appraisal will come in at value, but many times it won’t and there is always the possibility that it may come in even lower.  So you may be out the cost of another appraisal and still haven’t resolved anything.  Depending on the time frame you are working with, this may not be an option, or you may have to push out closing as this could take another couple weeks at least to schedule the appraisal and then get it back.

Ask the Appraiser to Consider other Comparables:

It’s always best if the listing agent can meet the appraiser at the property and give them the comparables (similar homes that have recently sold) they use to justify the value.  It is up to the appraiser whether they use them or not.  But sometimes when the appraisal comes in under value there is a discussion that different comparable properties could have been used.  If this is the case, you can petition the appraiser to take a second look at the appraisal with these other properties and see if they change the value of the appraisal.  Again, this takes time to do, as you can’t just call the appraiser.  You must go through the lender who then contacts the appraiser.  The appraiser has to work it into their schedule and then get back to the lender who gets back to you.

Come up with the Difference:

If the funds are available and the buyer doesn’t want to mess around, they may just decide to come up with the difference.  If they have a $500,000 contract where they have a conventional loan with 20 percent down.   Their down payment would be $100,000.  If the appraisal came in at $480,000 then they would have to put down $116,000 ($480,000 x 20% = $96,000, $500,000-480,000 = $20,000).

Negotiate a Solution:

Buyers and sellers can come up with any number of agreements that satisfy both parties and the lender involved.  They of course will have to agree to use the value of the appraisal as the new sales price.  But they may also agree that the seller not have to pay closing costs for the buyer.  Or that the seller not have to do some of the negotiated repairs to the home.  Or it may be that the seller agrees to the new appraised value as the sales price or the buyer walks.  Negotiations can take many variations and many tones.  Usually though if both parties are willing to share the pain an answer can be found.

As you can see there are many solutions to the issue of a low appraisal.  Like in all problem solving be open to different ideas and using one or a combination of the above to help resolve the situation.  Hopefully, if this happens to you, you will be in a situation where all parties involved can work together to find a successful resolution.

Contact Minneapolis area Realtor Dan Kokesh to discuss a marketing plan for your home.