How to Deal With a Low Appraisal
Closing When the Appraisal Comes in Low
Multiple-offer situations in a seller's market often drive purchase prices higher than any comparable sales in the area, and this can result in a low appraisal. Sellers are also rightfully concerned that appraisals will be low in buyer's markets when prices are soft or falling.
In fact, low appraisals can happen in any marketplace—hot, cold or neutral. Fortunately, you're not without options when and if you're faced with one, from adjusting the sale price to tweaking the down payment or arranging for another appraisal.
Why Do Low Appraisals Happen?
Homes can fail to appraise at the sale price for a number of reasons.
Artificially inflated prices can result from multiple offers, and declining market values can result when fewer buyers are shopping among a larger inventory of homes. Market values can rise due to limited inventory and few comparable sales.
An Inexperienced Appraiser
An inexperienced appraiser who doesn't understand local influences on value can also be the culprit, although this is rare thanks to internal review processes and rules created under the Home Valuation Code of Conduct (HVCC).
The appraiser might have overlooked pending sale data, which could reflect higher comparable sales when closed, or they might have selected comparable sales from the wrong neighborhoods.
Other Common Factors
The underwriter might have made an incorrect evaluation, or the seller might have overpriced the property.
One factor that does not come into play is whether the lender wants to make the loan. Lenders want to lend money. It's how they make money. And lenders are prohibited from redlining—delineating areas on a map where they don't want to make loans.
Make Up the Difference in Cash
It's tough to remain calm when it appears that a pending sale will fall apart, but both parties have options. The buyer can make up the difference between the appraisal value and the sale price in cash.
The lender only cares about the appraisal to the extent that it affects the loan-to-value ratio. A low appraisal doesn't mean the lender won't lend. It just means that it will make a loan based on the ratio agreed to in the contract at the appraised value.
Sometimes the buyer's lender won't allow the buyer to give cash for the difference. The buyer might pay some of the seller's closing costs instead if this happens.
Lower the Price
It's often the best solution is to simply reduce the price if the home was overpriced or the value was inflated. It makes the buyer happy and the lender is satisfied. And it might be worth it to keep the buyer.
There's no guarantee that the seller won't receive a low appraisal from the second buyer's lender as well if the first buyer walks away. This isn't even to mention the time and trouble it takes to sell the property again. Sometimes a bird in the hand is best.
Carry a Second Mortgage
Another option is for the seller to carry a second mortgage for the difference. Making payments to the seller or a lump sum payment at a later date might be an option if the buyer really wants the home but simply can't come up with the difference in cash at the present time.
Dispute the First or Order a Second Appraisal
Request a copy of the appraisal report from the buyer if you're the seller, then contact the lender and ask about their dispute practices.
Only the lender can insist upon a second appraisal, and typically only the buyer can make a request for another, which might or might not be honored. You can offer to split the cost of the second appraisal if you're the seller.
Sometimes the second appraisal will come in higher than the first, especially if the first appraiser made mistakes.
You can also ask the seller to pay for an independent appraisal.
Supply a List of Comparable Sales
Ask the agents involved to put together a list of recent comparable sales that justify the agreed-upon sale price, then submit that list to the underwriter and ask for a review of the appraisal.
Try to use comps closer to the subject property than the comps that were used by the appraiser.
Call the Listing Agents of Pending Sales
You'll have to ask your agents to handle this, but they can try to learn the actual sale prices of properties that are pending but haven't closed yet.
Listing agents don't have to disclose sale prices, but many are happy to help out because they could find themselves in the same situation. And your agent can always ask if the other agent thinks your price will appraise if the agent refuses to divulge the pending price.
Meet in the Middle
Sometimes sellers will back off a little on the buyer paying the entire difference between the sale price and the appraisal. They'll settle somewhere between a full cash contribution and completely lowering the price.
For example, a seller might agree to accept $5,000 in cash and lower the price by $5,000 if the difference is $10,000.
Cancel the Transaction
Many purchase contracts contain loan contingencies. The buyer won't qualify to buy the property at the agreed-upon terms if the appraisal comes in low, and a properly written loan contingency allows the buyer to cancel the contract under this circumstance. The seller must release the buyer's earnest money deposit.
The seller might be able to sell for more by putting the home back on the market and looking for a new buyer. The new appraisal could be very different, provided that the low appraisal wasn't FHA. FHA appraisals are assigned a case number, so the same appraisal would be used if the first buyer was FHA and the second buyer was FHA as well.
Board of Governors of the Federal Reserve System. "Federal Fair Lending Regulations and Statutes: Fair Housing Act," Page 1. Accessed Jan. 17, 2020.
Consumer Financial Protection Bureau (CFPB). "What Is a Loan-to-Value Ratio and How Does It Relate to My Costs?" Accessed Jan. 17, 2020.
Quicken Loans. "Saving Your Home Sale When the Appraisal Comes In Too Low." Accessed Jan. 17, 2020.
Garden State Home Loans. "What to Do If You Get a Low Appraisal." Accessed Jan. 17, 2020.
MountainSeed Appraisal Management. "Why, How, & When You Should Get a Second Appraisal." Accessed Jan. 17, 2020.
Quicken Loans. "How An Appraisal Contingency Can Protect You." Accessed Jan. 17, 2020.