So you’ve made an offer on your dream home. You’re preparing paperwork and trying to figure out what color you’re going to paint the kitchen and how you’re going to remodel the bathroom. You’re excited! After a home inspection, the next stage in the escrow process is to get an appraisal.
The bad news? The appraisal came in far lower than the purchase price.
Also known as a real estate appraisal, property valuation, or land valuation, the home appraisal is the process of discovering the actual value of a real estate property. Before issuing a loan to a home buyer, the bank or lender conducts an appraisal to understand the true value of the home.
If the appraisal comes in low, the home buyer would get a chance to haggle, but the chances of that happening are incredibly low. We’re talking below 10%.
Here’s the good news: you have options!
Whether the low appraisal is due to inflated rates, a declining market value, or the seller simply overpriced the home, you’re still left with the following options:
- The seller can lower the price.
- The buyer can pay for the difference.
- A second appraisal can be requested.
- You can collect a list of sale prices from recent local home sales that justify the agreed upon price (do this by contacting listing agents!).
- The buyer or seller can cancel the deal.
In this blog, we’re delving into each of the above in more detail, so you can understand what is the best course of action you can take, should you find yourself in this situation upon closing.
Common Reasons for Low Home Appraisals
Before we dive into the various situations that arise from low home appraisals, it’s important to understand why low appraisals happen. There are quite a few reasons your home’s appraisal might come in lower than you expect. Here are some of the common culprits.
- Rising market or sellers market where bidding wars often drive home sale prices higher than appraisals can support.
- Slowing or buyers market where sellers may mistakenly overprice their home because they’re not aware of how much their value has decreased.
- A poorly trained appraiser or someone who’s unfamiliar with the intricacies of your local market can produce a low appraisal.
- Inaccurate comps where an appraiser is using comps that aren’t a great match with the home being appraised.
Don’t let yourself fall victim to any of the above! Make sure you do your research when listing your home, making an offer, or selecting an appraiser.
1. The Seller May Lower the Price
In order to secure the deal, it is in the seller’s best interest to renegotiate the terms so that the buyer can purchase at a lower price that falls in line with the appraisal amount.
Keep in mind that this usually doesn’t happen during a seller’s market, as this is more competitive and the seller has an advantage where they can choose from multiple offers or enter a bidding war. However, in a normal or buyers market, it is more common to see a seller lower the price.
2. The Buyer May Pay for the Difference
The buyer can increase their down payment or shift some down payment to make up the difference. For example, if the buyer needed the appraisal to come in at $300,000 but it comes in at $290,000, the buyer can pay the $10,000 difference in cash. What the lender is concerned about is the ratio of the loan to the appraised value of the home, not necessarily the purchase price.
3. A Second Appraisal Can Be Requested
The seller can also appeal the appraisal. Whoever is the person who paid for the appraisal can ask their lender to challenge the appraisal if they believe the appraiser used incorrect information or bad comps, or if they weren’t familiar enough with the area.
4. Partner With a Realtor to Collect a List of Sale Prices
The seller can also conduct your own research on the current market and on comparable homes in your area to self-assess the market value of their home. Partnering with a trusted realtor can help you get the information you need in an accurate and professional manner. Once you and your realtor have this list of sale prices, present it to the appraiser with a rationale.
5. The Buyer or Seller Can Cancel the Deal
If the buyer and seller cannot come to an agreement (either the seller doesn’t want to come down in price or the buyer doesn’t want to pay what they initially offered), then one side may end up backing out of the deal.
The buyer may back out in order to find a comparable home in the area at a lower price. The seller may back out in order to find a buyer that will pay the price they are asking for.
Get Through the Home Closing Process With New Venture Escrow
When closing on a home, you hope that things go smoothly – but you never know what to expect and what roadblocks may get in the way. That’s why you need to surround yourself with trusted professionals that understand the process and have seen every situation imaginable. New Venture Escrow is San Diego’s premier escrow company.
Our Escrow Officers are ready to help you through every step of closing. Get in touch with us today!
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