In seller's markets, multiple offer situations often drive
up
the purchase price higher than any comparable sales in the area, so sellers
worry the appraisals will come in low. In buyer's markets, when prices are soft
or falling, sellers are also concerned that the home will bring a low
appraisal. Low appraisals can happen in any marketplace: hot, cold or neutral.
Why Do Low Appraisals Happen?
There are a number of reasons why appraisals come in low.
Here are a few:
- Artificially inflated prices resulting from multiple offers.
- Declining market values due to fewer buyers shopping among a larger inventory of homes.
- Fallout from an abundance of foreclosure or short sales in the neighborhood, especially when no other comparable sales exist.
- Incorrect evaluation by the underwriter.
- Overpricing by the seller.
- Inexperienced appraiser who doesn't understand influences on value.
- Appraiser overlooked pending sale data, which could reflect higher comparable sales when closed, or the appraiser selected comparable sales from the wrong neighborhoods.
- Buyer receives cash back from the seller, causing lender to believe the price has been inflated.
- One factor that does not come into play is whether the lender wants to make the loan. Lenders want to lend money, and lenders are prohibited from redlining.
Solutions for Low Appraisals
Don't panic if the appraisal comes in low. It's tough to
remain calm when it appears the pending sale will fall apart, but both parties
have options:
1. Reduce the price of the house to the appraised value
As the seller, you can always sell the house at the
appraised value without negotiating with anyone. This is the fastest way to
“recover” from a low appraisal, but it could mean leaving money on the table.
(And that’s always hard to swallow.)
2. Have the buyer make up the difference
In some cases, the buyer will have enough cash on hand to
cover the difference between the appraisal and the selling price at closing. If
the buyer feels confident that the value is there for her — despite the
appraisal — she can simply add cash to the down payment, and the lender should
be satisfied.
3. Meet in the middle
If both parties still want the sale to go through, it could
make sense to split the difference, with the seller dropping the price a bit
and the buyer adding cash to the down payment.
For example, if the difference between the sales price and
the appraised value is $10,000, the seller could lower the price by $5,000 and
get the buyer to bring another $5,000 to closing. This solution depends
entirely on the relative willingness and financial positions of the two
parties.
4. Challenge the appraisal
This option is a bit of a long shot. Only the appraiser’s
client — the lender — can demand a review of the appraisal, and only the buyer
can request a review or a second appraisal.
As the seller, you can support the buyer in this effort by
sharing the competitive market analysis that you received from your agent or by
giving her the results of an independent appraisal, if you have one. You also
can offer to split the cost of a second appraisal if the lender agrees.
This route has long odds because the decision is ultimately
up to the lender, and the lender doesn’t have the same investment in the
transaction that the buyer and seller have. If the lender doesn’t have a
compelling reason to doubt the appraisal, then that tends to be the end of the
line. (In my experience, only a small percentage of these requests are
granted.)
5. Put the house back on the market
If the buyer can’t or won’t put more money down, and you’re
not interested in reducing the price, you can take your chances by allowing the
deal to fall through and putting the house back on the market.
This can be disappointing to everyone involved. But if
you’re in this situation because multiple offers brought the offer price above
the asking price, then it might not be a bad way to go. You could get lucky and
receive a cash offer when your agent relists the home. In that scenario, the
appraisal won’t be an issue. Plus, even without the cash offer, another
lender’s appraiser could have a more favorable point of view.
When considering scrapping your deal, don’t forget that at
this point your house has been off the market for several weeks and you’re
putting yourself that much farther from a closed sale.
This is where your agent is especially helpful. Your agent
understands what the market is doing and can clarify your options so you can
make the best decision for that moment.