What if the Appraisal Comes in Too Low?
If anyone is financing a home, an appraisal is sure to be completed. Before a lender is going to extend credit to a borrower, they need to make sure that they're not giving someone a loan that's more than the fair market value of the property. This is where an appraisal will take place. An appraiser will give their unbiased opinion on the actual value of the home based on comparable sales nearby, current sales, and any features that can add or detract from comparable sale prices.
However, if the appraisal is less than the buyer's offer, there are different ways that the buyer and seller can go about completing the deal. The appraisal comes in at a lower than the asking price is not uncommon, especially in this unique real estate market. Many buyers are offering over asking price, which naturally inflates the value making an appraisal almost impossible.
An appraisal reviews the entire condition of the property looking at a wide variety of features like the year the home was built, zoning details, construction details, additions, and the integrity of the property, amenities, and utilities. They will provide a report to the lender stating their unbiased opinion of the property.
However, there are a lot of reasons, and appraisal can come in low. If there is a lack of comparable properties, as we're seeing with just a lack of inventory in general, this may be one of the issues. If the market is moving faster than appraisers, home values in a hot market could be going up but appraisals might not be matching that pace. For instance, if last week's home prices were around $400,000 on average but this week, new homes have come on the market and been sold so quickly that now the value is $500,000, last week's appraisal may not be accurate with this week.
So what can buyers do if the appraisal comes in too low?
Sellers can reduce the price.
Depending on the situation, many sellers are not even thinking about reducing their price because they don't have to. Buyers are coming up with additional cash and because the market is sustaining those values, sellers will simply terminate the deal and pass it on to the next person. But, if there's not a lot of competition, sellers may want to reduce the price or at least meet the buyer halfway to get the deal done.
Buyers can come up with the rest of the cash.
If it's not an exorbitant amount of difference, buyers may be able to come up with the extra cash to cover the difference. If the home appraises for $400,000 and you've offered $420,000, $20,000 extra may not be that big of a deal to come up with. However, these are ways you can negotiate with the seller to reach an agreement for all.
Dispute the appraisal.
As I mentioned before, what works last week may not work this week so you may be able to dispute the appraisal and pay for a new one providing up-to-date comps, talking about any additions that the home may have that the appraiser may have missed, or any other reasons to demand another appraisal.
Comps, or comparables, are really the best way for an appraiser to make an accurate value of the property. Buyers may be able to negotiate and come to an agreed-upon middle line to make a win-win for all. For instance, a seller might agree to pay some of the difference between the sale price and the appraisal long as there are accurate comparables that make sense.
Appraisals are one of those tricky things in the real estate process that can certainly throw a wrench in the matter. But with a little bit of negotiation, communication, and figuring out how to make it a win-win for all, both parties can walk away happy and with the prophet and the house they really want.
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