What Happens When a Home Doesn’t Appraise
First and foremost a low appraisal does not mean that the appraiser didn’t like your home or you. Never take an appraisal personally, as it is always just business! Appraisers rarely care if the home is messy. They are generally looking for the functionality of the home itself, and not the appearance.
When appraisals come in low on the home you are buying, the transaction can go in one of really 3 directions:
1) The seller may reduce the price to the appraised value - The good news is that the buyer may have just saved some cash off the purchase price of the home! A low appraised value is always good leverage when renegotiating the price. When you do finally come to an agreement an addendum to the purchase contract will be required to reduce the sales price to the appraised value.
2) The seller sticks to their guns - The real estate contracts generally don’t require the seller to have to sell the property for anything less than the contract price. Most real estate contracts also include an appraisal contingency clause that allows the buyer to back out and get their earnest deposit back without recourse. The bad news for the buyer in this event is that you’ve most likely already forked over a few hundred dollars for the appraisal and property inspection, and generally that is a sunk cost and non-refundable.
Yes, the buyer can still purchase the property, however the buyer will have to make up the entire difference between the appraised value and the purchase price in cash in addition to any down payment needed. Lenders typically will not lend anything above the appraised value.
Contract Purchase Price: $225,000
Appraised Value: $200,000
Additional cash from buyer: $25,000
3) Meet somewhere in the middle - Sometimes the best way to handle this is to renegotiate the price and land somewhere between the appraised value and the contract purchase price. Keep in mind that the buyer still has to come out of pocket the difference between the appraised value and the new contract price, just like in the example above.
There is an unconventional fourth option:
4) Challenge the appraised value -
In my 16 years in the industry I have only seen this work less than a handful of times. Appraisers are human and do make mistakes, although the software they use make errors uncommon.
The only way to have an appraised value revised is to find comparable sales that strongly support a material change in a price adjustment. A great example would be a home in the same neighborhood, with the same floor plan, the same exact square footage, and the same features and upgrades sold for more and was not considered in the original appraisal. Many neighborhoods built in the last 20 years only have 4-5 different models, some are just mirror images of each other or have only slight variations in the exteriors. These types of neighborhoods make it much easier to find your exact model that has sold recently.
Your real estate professional should be able to give you a list of comparable homes he or she used when writing the original offer or initially putting the home for sale. Rarely do agents “use their gut” when pricing a home, unless it is a very unique home, a custom build, or has unique features that add or subtract from the value.
Remember - stay calm!!
Kenneth James Realty