Once you are under contract on your home, you’ll need to have an appraisal done. Typically the appraisal comes in right around your listing price, but sometimes you wind up with a low appraisal. This means that the appraisal comes back below the price agreed upon by the seller and buyer.
How does this happen and what should you do with a low appraisal?
A low appraisal can occur in a competitive market when multiple offers push the price above asking or even above FMV (fair market value). Another possibility is that the initial CMA (comparative market analysis) completed on your home skewed high, and the appraisal has suggested a more accurate valuation for the property.
If this happens, you’ll be glad you have a team of experienced professionals backing you up. A low appraisal doesn’t have to be a deal-killer, but you’ll need savvy advice and a cool head to move forward successfully in this scenario.
Now you have an idea of how the appraisal can come in lower than expected. Armed with this knowledge, let’s talk about what to do if this scenario occurs during your transaction:
Reduce the Contract Price
Possibly the simplest response to this situation is for you, the seller, to reduce the price to meet the appraisal. Depending on how motivated you are to sell and what your ideal timeframe is, this is a valid response. It is disappointing to settle for less than you thought you were getting for your property, but on the other hand, there is something to be said for the bird (or in this case the contract) you already have in hand.
The reality of mortgage lending is that the lender will not be willing to loan more money to the buyer than the value of the property. Something’s gotta give. For the sake of simple math, let’s say your property is under contract for $410,000, but the appraisal comes in at $400k. You have a $10,000 shortfall on your hands. You can ask the buyer to bring cash to the table to make up the difference (and in a competitive market like Denver or Seattle that has enjoyed for the last many months, this may be a viable option), or you could offer to meet the buyer in the middle – lowering the price by $5k and asking the buyer to provide an additional $5k in order to close the deal.
Put Your Home Back on the Market
Every sale is unique, but we’re going to caution you this may not be the best way to combat a low appraisal. You can certainly hedge your bets – especially in a seller’s market – that the next buyer will have the funds to cover any difference between the list price and the appraisal value.
But – and this is important – you should be prepared to be in the exact same situation when the appraisal once again comes in below the contract price. And, this time, your house isn’t the hot new listing it once was. If your property languishes on the market, you’ll end up selling for less than the original contract offered, anyway. It may be in your best interest to make your contract stick, even if it requires a compromise on your part to do so.
Challenge the Low Appraisal
You can challenge the appraisal with the lender or request a second appraisal of the property. If you choose this route it is important to understand that as the seller, you do not hold the cards in terms of challenging the appraisal or ordering a second appraisal on the property. Whether or not this takes place is entirely up to the lender, and a request of this nature can come from the buyer – but not from you.
Speak openly and honestly about your goals and willingness to press the issue of the appraisal with your agent. Your agent should be able to negotiate this situation on your behalf. Take some time and review the CMA with your agent. You may come to a clear agreement with the buyer about challenging the appraisal and still fail at the attempt if the lender does not agree to review or redo the appraisal, and since they are likely working with an experienced appraiser they know and trust, the likelihood that they will turn down this request is pretty high.
Be Optimistic but Realistic
Approach the sale of your property optimistically and with this caveat – the sale of your home is complete when the ink on the closing paperwork is dry, and not a moment before. The appraisal of your home is probably going to come in right on target and your transaction will progress without a hitch. But remember, the road to a real estate closing is sometimes a bumpy one. Make sure you have an expert agent working like those we have at TRELORA with you. You’ll be glad to have us along for the ride when you hit those bumps.