Four Options If Your Appraisal Comes in Low on Your Dream Home

Congratulations! You did exactly what your lender told you to do and you are qualified for a mortgage. You have found the home of your dreams and you didn’t even have to pay too much for it, given that there were three other offers on the home! Your new home sailed through the inspection and radon test with flying colors. It really is a wonderful property and you are ecstatic that it will be your home in 2 more weeks. The only thing remaining is the appraisal. Given how great your new home is -- how could that be a problem.

The home-buying process is a high-stakes thrill ride full of exhilarating ups and scary downs, but unquestionably one of the most deflating moments is when the appraisal comes in significantly lower than the accepted offer. What happens now? Your loan is a percentage of the appraised value of the home, so if the property appraises for less than the sale price, your loan is going to be less too. In order to close at the contract sales price, you will have to bring more money to the closing.

Either you suddenly feel that you made a terrible mistake by paying more than the property is worth or, if you don’t have extra cash to make up the difference, the deal will fall apart. Do not immediately assume that you paid too much. In a rising market, low valuations are not uncommon. Appraisals are based upon sales, generally within the last three to six months- which likely closed when prices were lower. In other words, by their very nature of being tied to a three to six month range, appraisals will not keep up with how quickly prices are changing in a hot market. You are bound to see lower-than-expected values placed on homes.

So, what do you do if this happens to you? You have several options:

1. Appeal the appraisal

This is probably the least likely to succeed.

Sometimes called a “rebuttal of value,” the appraisal appeal takes some work. In fact, it’s a total team effort.

The homeowner, loan officer, and often the real estate agent work together to find better comparable market data to justify a higher valuation. Perhaps the appraiser overlooked some comps (homes similar in style, location, and square footage which sold recently).

Maybe the appraiser used a comparable sale that looks like it’s in great condition, when in fact the home was trashed when purchased and has already been rehabilitated.

The loan officer writes an appeal using the new comparables and then sends it to the appraiser. There might be some negotiating back and forth until all parties come to a compromise with a new valuation.

2. Ask the seller to order a second appraisal

Maybe the second time is the charm!

If the appraised value is not as high as the agreed contract price, the seller may be willing to pay for a second appraisal. The appraisal can range between a few hundred dollars and $1,000 depending on the area. You have already paid for the first appraisal in your closing costs, so ask the seller to pay for the second one. After all, the sellers wants the sale to go through too.

3. Negotiate with the seller

This is the most likely to succeed

You might go back to the sellers and ask them to reduce the price or split the difference. The seller does not have to do negotiate, but they may prefer to do this rather than take a chance of losing you as a buyer, and starting over again. After all you are several weeks into the sales contract and the property has been off the market. The seller probably does not want to go back on the market and have agents ask why the first deal fell apart. The seller also knows that the next contract will probably have an appraisal contingency, so the seller might be better off renegotiating with you unless they have other offers without an appraisal contingency.

Sellers might be more willing to cooperate, especially if the Federal Housing Administration is involved. Lenders often require the use of their own FHA-approved appraiser, and these appraisals are “locked in” for six months. In other words, the low FHA appraisal will apply to any buyer with an FHA loan. This pushes the seller either to take the low appraisal or to hope that the next buyer has a different loan. In some markets such as a first time buyer market, most of the loans are FHA so the seller has few options.

Of all possible outcomes, this is what happens most frequently. While the seller will be unhappy initially with the low appraisal value, most reasonable sellers eventually come to terms with the fact that any other appraisal values by potential future buyers will most likely come in at about the same value.

4. Walk away

Sometimes you just have to walk away

No one wants to let a property slip through their fingers, especially if it feels like your dream home but this is not the time to become emotionally attached. Beware of ignoring a low appraisal— this could be a blip in the market and in a few months prices could stabilize to a lower range. By overpaying now, you could end up losing thousands when you decide to sell. Remember you make profit on your home purchase when you buy (low) - not when you sell.

Make sure you have an appraisal contingency in your contract so that you can walk away, get your deposit back, and hope for better luck the next time around.

If you have any questions about how to find a great deal in this market, give the Lise Howe Group a call at 240-401-5577 or email them at lise@lisehowe.com. There are still some fantastic homes on the market - and one of them could be yours.

Lise Howe is an associate broker with Keller Williams Capital Properties, licensed in DC, Maryland, and Virginia, with more than twenty five years experience. In addition to being a Realtor, Lise Howe is an attorney admitted to the DC Bar with experience negotiating international agreements on behalf of the United States Government for the Department of Energy. Growing up as an Army brat, Lise moved around for the first twelve years of her life, making her very sympathetic to anyone relocating to or from the DC area. Finally settling in DC before high school started makes Lise an almost native, who enjoys showing off her home town to buyers! Having lived in the DC area for many years has made her appreciate the diversity of the region and the growth of its many communities!