July 2017 – In the type of seller’s market we’re currently facing, the process is not always smooth sailing for home owners getting multiple offers, some well above the listing price. As competitive buyers drive up purchase prices, many sellers need to worry that bank appraisals will come in low. A low appraisal means the buyer may not be able to afford the home. It also can be detrimental to a seller’s ability to sell at the price buyers are willing to pay. In fact, low appraisals can happen in any type of marketplace, whether hot, cold, or neutral.
Possible Reasons for Low Appraisals
Here are a few reasons bank appraisals might come in low:
∙ Multiple offers artificially inflate the purchase price and there aren’t any comparable homes sold in the same range to support the price.
∙ The underwriter made an incorrect evaluation of the home.
∙ The seller overpriced the home.
∙ An inexperienced appraiser didn’t understand the influences on value.
∙ The appraiser overlooked pending sales, which could offer more comparable homes sold upon their closing. Or the appraiser selected comparable sales from the wrong neighborhoods.
∙ Rising market values due to sparse inventory and a limited number of comparable homes sold.
∙ The seller is offering cash back to the buyer in the deal, causing the lender to believe the home price is inflated.
Possible Solutions for Low Appraisals
A low appraisal doesn’t always result in a collapsed deal. Both buyers and sellers have options if an appraisal comes in low. Here are some ideas:
∙ If the buyer has the money and really wants the house, they can make up the difference in appraisal value and purchase price with cash. The lender cares about the appraisal in terms of how it affects the loan-to-value ratio, which means it would still lend money at the appraised value. Sometimes the lender won’t allow the buyer to make up the difference in cash, in which case the buyer could elect to pick up some of the seller’s closing costs.
∙ The seller can lower the price. If the deal falls through with a buyer whose lender received a low appraisal, the same thing could happen again with a new buyer. The seller has the option to help the transaction go through by lowering the price to appraisal value.
∙ Get a second appraisal. Buyers getting a conventional loan have the right to an appraiser who is familiar with their local market. A second appraisal could come in higher than the first, especially if the first appraiser was inexperienced, unfamiliar with the local market, or made an error. Sellers and buyers can determine who will pay for the second appraisal.
∙ Engage the real estate agents involved and ask for a list of all comparable homes sold to see if you have obvious evidence for a higher appraisal. Find out if there are comparables closer to your home than what the appraiser used. Submit the list to the bank’s underwriter and ask for a review of the appraisal.
∙ Agree to lower your value. To avoid going through the whole process over again with a new buyer, some sellers will agree to lower the price by an agreeable amount instead of asking for the full difference in appraisal value vs. purchase price. For example, if the difference was $10,000, the seller might agree to lower the price by $5,000 and accept $5,000 in cash.
∙ Cancel the transaction. Properly written contracts usually allow termination of a purchase contract if the buyer cannot get the proper financing. This also allows the seller to go forward looking for a new buyer. As a seller, you might have better luck with the next buyer and their lender’s appraisal. But be cautioned, if your buyer was getting an FHA loan and your next buyer is as well, then the same low appraisal will be used again.