Dealing With A Low Appraisal
What happens if an appraisal comes in too low?
If you want to buy a house, you’ve probably heard that inventory is low.
This means that there will likely be many buyers looking at the same limited pool of available houses. And this also often leads to bidding wars. For you, this may mean you end up offering well over the asking price in order to secure a property.
But, before you get too excited about the possibility of getting the house you want, you may need to deal with a problem you may not have anticipated: your appraisal may be too low.
What’s an Appraisal?
To further explain the importance of an appraisal, let’s back up a bit.
Say you offer above asking price on your dream house. You’ve been approved for a mortgage and you know you can afford this house.
This scenario isn’t unusual, especially in a hot market when selling prices get artificially driven up by bidding wars. But, just because you’ve been approved for a loan doesn’t mean you’ll automatically get this amount. Why? Your lender first needs to determine whether the house is worth what you intend to pay. To do this, the bank sends out an appraiser to check out the house for factors that can potentially decrease or increase the value down the line.
When determining the value, an appraiser uses the same data that buyers and sellers have access to, such as comparable sales in the neighborhood, recent renovations and additions, and other determining factors. In addition to this, appraisers use their own subjective opinions and interpretations of the data.
What Happens if the Appraisal is Low?
If the appraiser determines that the house is worth less than you plan to pay, this is called a low appraisal.
A low appraisal does not mean the lender won’t lend to you. It means the lender will typically loan you the amount agreed to in the contract, based on the appraised value. While this isn’t ideal, if you have a mortgage contingency, there are generally 5 paths that your transaction can take. Take a look:
1. The seller makes concessions:
In this scenario, your buyer’s agent would request that the seller lower the selling price to the appraised value. Why would a seller do this? Because if you walk away, the seller may receive the same low appraisal from the next buyer. In the meantime, it would take both time and effort to put the house back on the market. This may be motive enough for the seller to lower the sale price to the appraised value - and thus close the deal.
2. The buyer makes up the difference:
In this situation, you would make up the difference between the selling price and the appraised value in cash, or with a second smaller loan. This may be the best option for you if indeed the seller refuses to lower the asking price to the appraised value.
3. The buyer and seller meet somewhere in the middle:
This occurs when both the seller and buyer make some concessions to close the deal. This may mean the seller lowers the price but not all the way to the appraised value. It also may mean you have to come up with some extra cash to seal the deal.
4. Request a second appraisal:
Either the buyer or seller can pay for a second appraisal. Sometimes the second appraisal will come in higher than the first. But, also keep in mind that there is the risk that another appraisal could come in even lower than the first one. The bank will often use the second lower appraisal, which could put you in a position where you can no longer afford the house.
5. The transaction is cancelled.
The bank’s appraisal does not change and neither the seller or buyer are willing to make any sacrifices to move the transaction forward. The deal is then cancelled.
Be an Informed Buyer or Seller
Remember: a low appraisal doesn’t have to kill a deal.
While it’s important for buyers to understand what a low appraisal means, it’s also important for sellers to take the appraisal into consideration when reviewing any offers. And, both parties should pay close attention to the terms of the deal.
In fact, before you even set out to buy or sell a house, it’s a wise idea to align yourself with an experienced and knowledgeable real estate professional. This way, you’ll have someone to keep you informed of all of your options and help you navigate possible roadblocks.