Congratulations. You’ve enter the housing market, gotten mortgage pre-approved, and made a successful offer on your dream house. But what happens if the house appraises for less than the purchase price?
In the ever changing Real Estate world, today we have a problem with a shortage of homes for sale. This means it is likely that a seller will get multiple offers well above the asking price. Sounds great for the seller, but this also means there may result with the appraisal, commonly known as “coming in low.”
There are many reasons why an appraisal may be low. In rapidly changing markets, home prices continue to increase which is something makes it difficult for appraisers. Maybe the agent made a mistake. Maybe the buyer pressured the agent to list it higher than it should have been. Maybe the appraiser made a mistake. Maybe multiple offers drove the price too high. Maybe the buyer needing to roll in closing costs pushed the sales price over the market value. Who knows. It happens, and it happens a lot more often than buyers and sellers may realize.
There are many other reasons too. If you get the news that the appraisal came in lower than the sales price, don’t panic. Almost all of the deals still close!
Understand the whole idea of the independent appraisal is that an unbiased, highly trained third party is there to protect the buyer and the lender. The buyer doesn’t want to pay more than fair value, and the lender is obviously concerned about their collateral.
So What To Do If The House Doesn’t Appraise For the Sales Price?
The first thing is to review the appraisal to see if it has obvious errors. I’m not talking opinion of value differences, I am talking actual errors. For example the house is 3000 square feet, and the appraiser has it at 2400 square feet. Assuming an error, bringing it to the appraisers attention usually results in a quick fix.
TIP: If there is a measurement error, 99% of the time, the listing had the size too big. Few agents actually measure, while 100% of appraisers measure.
Have the agent gather what they believe are better comparable properties than the appraiser use. Don’t just give addresses. Give a detailed explanations of why they believe the appraiser should consider these homes instead.
TIP: Rare is it that the appraiser didn’t already consider the comparable you just submitted.
If there are obvious errors, or obvious poor comparible choices, there is the possibility of obtaining a new appraisal with a different appraiser. There are rules and guidelines to this process. It is not an easy route, plus the buyer would need to pay for the 2nd appraisal.
Options to make low appraisal deals still work?
Typically there are four routes when the appraisal is less than the sales price.
- Walk away. Any agent worth anything has written an appraisal contingency in the purchase agreement. This happens maybe less than 2% of the time.
- Buyer can pay cash out-of-pocket for the full difference between the purchase price and the appraisal. The down payment and all loan parameters will be based off the lower appraisal. This happens maybe 3% of the time.
- Seller drops the sales price to match the appraisal. They may piss and moan, but this happens in probably 70% of the cases. This is because cancelling doesn’t work for anyone, and putting the house back on the market is no guarantee you won’t get a similar appraisal down the line.
- Seller and buyer split the difference somehow. A common route is the seller lowers the price a bit, and the buyer pays a little more out-of-pocket. Another common route is that is the seller was paying some of the buyers closing costs, maybe they reduce or eliminate seller paid closing costs. This options happens maybe 25-% of the time.
Hopefully my math worked out to 100%, but as you can see, most real estate transactions that have an appraisal come in low still get to the closing table.