You’ve gotten the home under contract, you’ve negotiated inspections, you’ve started 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”
Now to everyone out there who just read that last sentence and think to themselves “So What?”…allow me to explain this as simply as I can: When going under contract for the sale of a 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; the appraisal contingency. What this does is ensure the lender is lending the appropriate amount of money on the property… in other words, is the lender 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 one or both parties are not in compliance and can no longer settle as originally agreed.
The following are the most common outcomes from this dreaded scenario and how to keep the deal alive:
- Desk Review – As soon as you get a low appraisal, everyone should request a copy of the report to 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.
- 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.
- 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 run the risk of getting an even LOWER value.
- 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?
- 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 #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.
- 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 I have had all of these things happen to me and low appraisals are not total deal killers. You do enough deals where buyers and sellers are pushing the upper ends of market values, 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.
If you have any questions on anything I’ve discussed, I hope you will reach out to me via 610.804.104 or firstname.lastname@example.org