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When the appraisal comes in lower than your offer price, it’s either an opportunity for you to renegotiate the sales price with the seller — or it’s going to completely derail your home sale, and you’ll have to start over again. Either way, as the buyer, you have some work to do to figure out what this means for your purchase and which avenue to pursue.
It’s tough to decide between your many options. Lean on your agent’s expertise and advice when discussing each of the paths you could take.
What is an appraisal?
First things first. If you’re financing your purchase with a mortgage loan, your new property most likely needs to undergo an appraisal to complete the transaction process. But what exactly is an appraisal? In simple terms, it’s a valuation of your property to determine its current worth and confirm the purchase price matches accordingly. According to California real estate agent Ed Kaminsky, an appraisal is a “verification process” that the market did its job and the market value for your home is accurate.
Lenders will almost always require an appraisal to be done by an independent third party if you’re getting a mortgage loan. After all, the bank or institution wants to ensure they’re protecting their investment and you aren’t overpaying for your purchase. They are hoping to confirm the value of the home is greater than the loan amount and they can recover any losses in case of a loan default. So, given 78% of buyers financed their purchase in 2022, there’s a good chance you will encounter an appraisal at some point before closing.
How does an appraisal work?
If you’re curious about how an appraisal is calculated, it’s actually pretty simple, Kaminsky says. First, a licensed appraiser, usually hired by your lender, completes a thorough evaluation of your home, taking into account its location, condition, upgrades, and any other features. After that, they dig through the paperwork.
They look at comparables (or comps) in the area to see — you guessed it — how your home compares. They’ll find at least three homes, Kaminsky says, that are similar in size, age, location, and condition to compare sale prices and evaluate market conditions. Appraisers tend to “sandwich” the property as well, finding homes valued slightly above and slightly below to see how your home stacks up. They might look at tax records and other real estate indicators as well.
Once their work is finished, they’ll complete a standard appraisal report and send it to both you and your lender with all relevant information.
How common are low appraisals?
Not extremely common, Kaminsky says, but it does happen. According to CoreLogic, only 6.3% of appraisals came in lower than the contract price in October 2022. Additionally, 7% of recent terminated or delayed contracts were because of appraisal issues.
However, fluctuations in market conditions can increase the appraisal gap. For example, in 2021, we were in the middle of a “hyper appreciating market,” according to Kaminsky, which meant home prices were constantly increasing. And since appraisers look at past home sales, the comps might not have caught up to where the home prices were at the moment.
For example, if a home sells for $500,000 in a highly competitive market, the comps, usually taken from home sales in the last 90 days, might still show similar homes selling for closer to $450,000. That would cause the appraisal to come in lower than the purchase price even though the market allows for higher home sales.
“Because you’re looking in the past and the appreciation could have taken place, it is possible that a home sells for more than it has ever sold for in a particular neighborhood,” Kaminsky says.
Now, what should you do if that happens? Let’s take a look at a few options.
Option 1: Renegotiate the deal
Instead of viewing an appraisal lower than your offer as the end of the line, use it to negotiate with the seller.
Unless you’re paying cash, you cannot buy the house if you’re unable to obtain a mortgage. With concrete evidence that the home is worth less than the seller thought, they might be open to lowering their price to meet the appraised value. If they priced their home too high or had unrealistic expectations of local market conditions, then the appraisal will serve as a dose of reality.
The sellers can refuse to lower their price and take their chances of receiving another offer, but it’s risky. Other buyers could encounter the same problem with their financing. Once the home has appraised lower than their listing price or your offer, it’s likely to appraise low again. If it’s late in the buying season, putting the home back on the market could waste valuable time.
If they are unwilling to budge on price, you can also renegotiate seller concessions. Offer to split the difference; if the home under-appraised by $20,000, they could lower the price by $10,000 and you could put an additional $10,000 into the transaction.
Jesse Zagorksy, a top-performing San Diego, California agent with almost two decades of experience, advises: “Have your buyer’s agent talk to the listing agent and find out what is truly important to the seller in addition to the price of the house. Are there any other terms that matter, such as the close of escrow date, furniture, and possessions, or offering free rent?”
For example, if the seller doesn’t want to move that huge entertainment console or hasn’t found a new place to live yet, sweeten the deal by offering to let them leave the console and make you responsible for its disposal or to let them stay in the house rent-free for a month.
In certain circumstances, you could ask about seller financing. With seller financing (a “seller carryback”), you take out a private mortgage between you and the seller. While rare, Zagorsky has seen a buyer successfully negotiate this when the seller was retiring and downsizing and had significant equity in the home. This strategy works if the seller has paid off their home in full and sees value in receiving regular monthly payments, which are essentially a passive income stream.
Option 2: Find a new lender
If you were eager to get started house-hunting, you might have applied for pre-approval with one bank rather than shopping around. In an appraisal-lower-than-offer situation, now could be the time to look at another lender. Their appraiser might view the property differently.
When multiple appraisers value the same home, Tom Cullen of Cullen Real Estate and Appraisal Company says that “invariably two appraisers will arrive at slightly different values due to comparable sale selection and subjective property characteristics, such as quality and condition.” Banks use different appraisers and set different appraisal criteria, and another bank could arrive at a different home value.
Consider looking for a different lender if:
- You have great credit.
- You have access to other financing options.
- You think another lender will better understand the situation.
If you have excellent credit, it may be easier to get pre-approved with another bank. You’re under no obligation to inform the new lender that the home appraised low with another lender, and if you apply within 30 days of the last application, it won’t hurt your credit score. However, you may have to pay application and appraisal fees again.
Unfortunately, individuals with poorer credit have a harder time qualifying for a mortgage. If you struggled to get pre-approved, you may have fewer financing options and less flexibility in the upper limit of your price range.
If you switch lenders, you will get a new appraiser. But switching lenders will cost you time and money, so be sure that you truly want this specific home before applying elsewhere.
Option 3: Challenge the home appraisal
An appraisal isn’t set in stone. While appraisers look at home sales and other data, they still apply a significant amount of judgment when assessing a home’s value. It is possible to challenge an appraisal lower than offer, and it could help you buy your dream home.
Throughout his 30-year career as a home appraiser, Cullen has seen borrowers in this situation request a reexamination by the original appraiser. According to him, “often the borrower will supply comparable sales that they feel might be beneficial to their cause and sometimes clarification of salient facts about their property that the appraiser might have overlooked.”
Appraisals can come in lower due to insufficient comparable sales to support the price, an inflated price, or a lack of similar transactions. An appraisal is “a defensible document that needs to show supporting data,” says Cullen, so if you give the appraiser data to defend a higher price, you might be successful in challenging the original appraisal.
Option 4: Request a new home appraisal
To request a new home appraisal, gather your facts, strategize with your agent, and talk to your lender. They will ask you to complete a “Reconsideration of Value” form. As an example, the form with Veterans Affairs requires homebuyers to provide the following:
- Three comparable sales (comps) that closed before the appraisal date
- MLS printouts of these comps with sales data and seller concessions
- A narrative explanation explaining why these home sales are superior to the appraiser’s comps
If you are using FHA or VA financing, the appraisal doesn’t expire for 90 days. You might not be able to get a new appraisal right away, though this could work in your favor. Comp data could have time to catch up with your offer.
“Because appraisals are based on historical data, they often lag the market, especially when prices are going up,” Zagorsky explains, so waiting a few months to have the property re-appraised could result in a different appraisal. The lender doesn’t have to honor your request, though. If they do decide to allow another appraisal, they will likely require you to pay a second appraisal fee.
Option 5: Pay more for the house
If you have more money that you can put into the purchase, you can pay more for the property than its appraised value. This isn’t against the law, and there are many reasons why you might value a property more highly than a bank does.
Cullen thinks that “living next door or in close proximity to family or work, sentimental reasons, or the necessity of obtaining a property quickly” are all reasons that you might be willing to pay more than market value for a house.
Ultimately, if you have the cash and living in the home matters more to you than what you pay for it, this is always an option. Before paying more than the house’s value, however, be sure that you intend to live in it for a while. You are going into the house knowing that you paid above market value and, even if not underwater on your mortgage right now, you are taking a risk that could easily lead to an underwater mortgage if you aren’t careful (where you owe more money on your house than it’s actually worth). If you had to sell your house within the next few years, it could very likely sell at a loss.
Bonus option: Walk away or wait it out
Depending on how much you love the home, walking away could be your last option or your first. Most real estate contracts contain provisions allowing you to exit the contract, and an inability to obtain financing is often one of them.
Challenging an appraisal or negotiating with the seller can all take considerable time. During that time, you could miss out on another place that fits your criteria and appraises at your offered value. If the property didn’t check off every item on your list, you might want to walk away.
If one of Zagorsky’s clients decides to walk away, but still loves the house, “we always keep an eye on that property and keep in touch because you never know when something might change on the seller side, and they might become more flexible.” If the home sits on the market, or other buyers also can’t get it to appraise at offer value, the seller must sell eventually. They’ll have no choice but to bargain.
So, which option is best for me?
The simple answer: it depends. All sales and all buyers are different, so there’s not a one-size-fits-all answer. However, Kaminsky says the first thing to consider is your own financial capabilities.
Think about which of the above options best suits your financial situation at the moment and what’s at stake. Are you able to increase your down payment to get your dream home? Will it hurt you financially to dig into savings a bit? What will happen financially if you lose out on the sale?
Next, it’s fair to ask yourself and your real estate agent, “am I overpaying for the property?” If so, you may consider renegotiating or getting a second opinion. If not, consider if it’s possible there is “hyper appreciation” in the market and what that means for the sale.
Kaminsky says in the case of hyper appreciation, it might be wiser to grab the home while you can. After all, in a highly competitive seller’s market, there’s no guarantee the next home that goes up for sale isn’t thousands of dollars more, and, suddenly, you’re in a worse situation.
“You have to consider, ‘where is the market going?’ and ‘what is the buyer’s financial capabilities?’ in order to decide which option is best,” Kaminsky says.
When you first hear that your potential new home didn’t appraise, don’t panic. Yes, it’s stressful, but your agent can guide you toward making the best choice for your situation. If you can do that, you should be on your way to your dream home, no matter what the appraisal says.
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