It’s a seller’s market and the low supply of homes for sale combined with high demand has pushed prices up, making multiple offers and bidding wars more likely. Yet that dynamic can also increase the possibility that an appraisal may fall short of the agreed upon sales price.
Banks use appraisals to determine whether the amount of the mortgage is justified by the value of the home. They do this because they want to be able to recover their funds in case the borrower defaults on the mortgage. Appraisers look at the size and condition of the home, any upgrades or condition issues, the number of bedrooms, the lot size, location, and other features. They then compare the subject property to active listings, pending sales and recent closed sales, making adjustments to arrive at a value.
If the appraised value is at the contract price, as it often is, then the buyer is able to remove their appraisal contingency and move forward. But if the appraisal comes in below the contract price, then there are several options.
First, Try to Prevent A Low Appraisal Problem
Make sure that you provide the appraiser with as much information as possible that supports the price of the home. It’s always best if the real estate agent meets the appraiser and provides them with pertinent comparable sales information, especially if the appraiser is from out of the area and may not be as familiar with the particular neighborhood. Provide the appraiser with a list of improvements, along with the cost and dates they were done.
Options if An Appraisal Comes in Below The Contract Price
If the appraisal does come in below the contract price, there are several options. One possibility is that the buyer could pay more than the appraised value if they have the funds to do so. Let’s say, for example, that the contract price is $600,000 and the appraisal comes in at $590,000. The bank would now make a loan for 80% of the $590,000. So if the buyer was planning to put 20% down, they would put down 20% of $590,000 plus $10,000 to make up the difference. What happens if the buyer is willing to pay more but doesn’t have a spare $10,000? If the buyer qualifies for the purchase with a lower down payment, say 15%, then they could make a smaller percentage down payment, which would free up funds for the gap between contract price and appraisal value.
Another possibility is for the seller to accept a lower price, or for buyer and seller to compromise on a price somewhere between the original contract price and the appraisal value. So for example, if the contract is at $600,000 and the appraisal is at $590,000, they might negotiate to a price of $595,000.
Still another option is for the lender or agent to write an appraisal rebuttal, providing the appraisal management company with information to support a higher appraisal value. This could include information on comparable sales the appraiser may have overlooked or upgrades the appraiser didn’t adjust for. Many appraisal management companies and appraisers are reluctant to modify the appraisal or change the appraisal value, but occasionally this can be a successful strategy.