HOME APPRAISALS: WHAT ARE THEY, AND WHAT TO DO IF ONE IS TOO LOW
What is a home appraisal?
Most people will be getting a loan in order to purchase a house. Before the mortgage lender approves and issues the loan, it will want to verify that the house is actually worth whatever the agreed upon contract price is. Therefore, they’ll hire an independent appraiser to appraisethe property.
What happens when an appraisal is too low?
If an appraisal is too low, the lender isn’t going to issue the full loan amount. And when this happens, the buyer may no longer be able to afford the house. So when this happens, what can you do?
What can a buyer do if an appraisal is too low?
There are few options if an appraisal is too low:
1. PROVIDE ADDITIONAL OR ALTERNATIVE COMPARABLE SALES (I.E. “COMPS”) TO THE APPRAISER IN AN ATTEMPT TO INCREASE THE APPRAISAL VALUE
There are different approaches an appraiser may use when valuing a property, and in residential home sales the Sales Comparison Approach is often the approach that has the most reliance placed on it. With this approach, the appraiser compares one property to comparables (i.e. comps) or other recently sold properties in the area with similar characteristics.
Sometimes appraisers just pick bad comps that aren’t really similar to the subject property. Or they may not include comps in their report that would actually support the contract price. In any case, providing additional or alternative comps may help get the appraisal value up to where it needs to be. (That is, IF the appraiser agrees that the new comps you’re providing a valid comps. The appraiser is under no obligation to consider the comps you supply.)
2. RENEGOTIATE THE SALES PRICE
A buyer may also try renegotiating the contract price down to the lower appraisal value. However, it’s worth noting that if the listing agent is wise, he or she will probably make the buyer attempt getting the appraisal value up (by supplying new comps) before considering a renegotiation of the sales price.
3. MAKE UP THE DIFFERENCE IN CASH
Another option would be to make up the difference in cash. A quick an easy example would be if the contract price is $100,000 and the appraisal comes in at $95,000 - if you’re able to bring the $5,000 difference in cash to the closing table**, that would get the deal done.(Note: this quick and easy example assumes the initial loan terms were $0 down payment / 100% financing for the sake of keeping everything brief.)
4. A COMBINATION OF THE OPTIONS LISTED ABOVE
Sometimes, you may have to use a combination of 2 or more of the options listed above to get the deal to work out.
5. CANCEL THE CONTRACT
Depending on the contract terms, the buyer may be able to cancel the contract and get their earnest money back. Paragraph 2B in TREC’s standard Third Party Financing Addendum allows for the buyer to back out of the contract (and get his or her earnest money back) if an appraisal is too low to obtain loan approval.