How to Deal With a Low Appraisal
Steps to Take If the Appraisal Is Lower Than the Offer
Low appraisals can happen in any marketplace—hot, cold, or neutral. It's not out of the question that an appraiser can make a mistake, or they might not have sufficient experience to get the process just right. It's possible that the seller overpriced their home, not willing to accept that it has some flaws that could (and should) subtract from the purchase price.
Fortunately, you're not without options when and if the appraisal comes in low, from adjusting the sales price to tweaking the down payment or arranging for another appraisal.
Why Do Low Appraisals Happen?
Homes can fail to appraise at the sales price for a number of reasons.
Artificially inflated prices can result from multiple offers. 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.
There might also be fallout from an abundance of foreclosure properties or short sales in the neighborhood, especially when no other comparable sales exist.
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.
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 their money. And lenders are prohibited from redlining—delineating areas on a map where they don't want to make loans.
What to Do About a Low Appraisal
Options for sellers and buyers are necessarily different because they're coming at the problem with conflicting goals. The seller wants top dollar for the property, while the buyer doesn't want to pay too much, and the buyer must additionally deal with a potential lender that's not going to finance a mortgage for more—or even most of—what a home is worth.
Make Up the Difference in Cash
The buyer can make up the difference between the appraisal value and the sales price in cash. The lender only cares about the appraisal to the extent that it affects the loan-to-value ratio, how much of a percentage of the home's value the mortgage takes up. 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 and if they really want the property.
Reduce the Price
The best solution is often 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 if the seller really wants to keep the buyer in a buyer's market.
There's no guarantee that the seller won't receive a low appraisal from another 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.
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. The appraiser isn't permitted to speak with the seller directly, or to the seller's agent.
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.
The buyer might also ask the seller to pay for an independent appraisal.
Provide 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 one, but they can try to learn the actual sales 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 down the road. 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 sales price and the appraisal. They'll settle somewhere between a full cash contribution and completely lowering the price.
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 include loan contingencies—the buyer can be released from the contract without penalty if they're unable to get financing. The buyer won't qualify 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 then 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. These 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.