What happens if Appraisal is Lower than Offer?
Whether I’m representing the Seller or the Buyer, one of my “absolutes” that I tell Clients is that the house has to be sold twice – once to the Buyer and once to the Appraiser.
An appraisal is an opinion of value made by an Appraiser about the subject home’s worth. The Appraiser looks at similar homes that have sold in the target neighborhood within the last few months, makes adjustments according to condition, upgrades, small size differences, etc. That information is written on a legal form that is presented to the lending institution providing the loan to the Buyer.
When listing a home for sale, a competent Realtor will do something similar (Comparative Market Analysis) to arrive at a reasonable price to list the property for sale. More often than not, the contract price and the appraised value will be similar and the purchase will proceed. But what happens when you’re buying or selling a house and the appraisal is lower than the offer?
What if Appraised Value and Contract Price are Different?
In order to get a loan to purchase a house, the bank (lender) hires an Appraiser (usually paid for by the Buyer) and asks for their assessment of how much the home is worth. The bank will not loan more money to purchase the home than the price given by the Appraiser.
As with most things, not all Appraisers are created equally. So what do you do if the Appraiser says the house you want to purchase (or sell) is worth $350,000 but you have an accepted contract for $365,000?
After you panic and then take a deep breath, there are five common options available:
- Ask the Seller to lower the price to $350,000 (the total lender will lend)
- Have the Seller come down $7,500 and Buyer bring $7,500 in extra cash (or any combination thereof to make up the $15,000 difference)
- Have the Buyer bring an additional $15,000 in cash to make up the difference
- Challenge the appraisal
- Cancel the contract and Earnest Money is returned to Buyer
Is a low appraisal good for a Buyer? It depends. In most of my negotiations, it’s the Seller who lowers the price. That makes it good for the Buyer. Since an FHA or a VA loan “stays with the property” for six months, it will often be difficult for a Seller to put their house back on the market and get it re-appraised for a higher value.
What if the Seller wants more than the appraisal value? You can negotiate, but do you want to pay more for a house than the appraised amount? If it’s a house you love, of course you might want to. If you feel it’s overpriced, you may want to reconsider. When faced with this decision, I always tell my Buyers – the appraisal is one person’s opinion. If you want the house and can afford to bring extra money, there is no shame or problem moving forward.
I’ve been doing this job for a long time, and never once have I known an appraisal to be changed when it’s been challenged. For one thing, they send the same appraiser out to re-do the appraisal!!! Don’t get me started on the kind of insanity I think that is!
What if Appraisal Comes in High?
Many people worry – can the Seller back out if the appraisal is high? No! Unless it comes in low, the Seller will rarely know what the appraised price is. When an appraisal comes in for one of my Buyers, either at value or higher, I tell the Seller’s agent that we are good on value and leave it at that.
It doesn’t happen very often, but if the appraisal comes in low, you have options. In most cases, the Buyer wants to buy and the Seller wants to sell. Don’t fret. And if you want more information or want to look at houses in the Colorado Springs area, call me. I’m here to help!