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What If Appraisal Comes Back Lower Than Offer

Is A Low Appraisal Good For Buyer


The answer to, Is a low appraisal good for buyer? is yes with some caveats. A low appraisal could be very good for you as the home buyer if the seller decides to lower the price to match the appraisal. However, youre taking a risk when the appraisal doesnt support the asking price. It could mean that the house is actually a lemon.

One thing is for sure: a low appraisal doesnt have to be a deal killer.

Negotiate With The Seller

If youre lucky, you and the seller will both budge a little.

You might go back to the sellers and ask them to reduce the price or split the difference, says Peter Grabel, managing director of Luxury Mortgage in Stamford, CT. The seller is under no obligation to do so, but they may prefer to do this rather than take a chance of losing you as a buyer, and starting over again. It is likely that another buyer will have the same issue, so the seller might be better off renegotiating with you unless they have other offers.

Sellers might be more willing to cooperate, especially if the Federal Housing Administration is involved. Lenders often require the use of their own FHA-approved appraiser, and these appraisals are locked in for six months.

The seller could be forced to take a poor appraisal or wait it out for a buyer with a different loan, explains Joshua Jarvis of Jarvis Team Real Estate in Duluth, GA.

Jeff Knox, broker and owner of Dallas-area real estate firm Knox & Associates, says this is the most common outcome in his area.

Of all possible outcomes, this is what happens most frequently, he says. While the seller will usually be upset about the low appraisal value, most reasonable sellers eventually come to terms with the fact that any other appraisal values by potential future buyers will most likely come in at about the same value.

Can You Debate The Value With The Appraiser

No one really enjoys being second-guessed its human nature. Appraisers do this for a living and they are licensed, trained professionals. They know what they are doing. More often than not, they will stick to their guns.

That said, if spoken to with respect and understanding, I have occasionally seen some movement in their opinion of value. I dont think you should count on this, though.

As mortgage brokers, we can sometimes ask the appraiser not to send the report to the lender until weve had a chance to review it. This might lead to a discussion of the value, or may even result in asking a second appraisal company for their view on value.

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What Hurts A Home Appraisal

If youre trying to buy or refinance a home, a good appraisal is key. If the appraisal comes in too low, you might not be approved, or you could face higher interest rates. A number of factors can negatively affect your appraisal, including:

  • Deferred maintenance
  • Not being up front about needed repairs
  • Comparable properties that are outliers
  • Appraiser experience

Common Reasons For A Low Appraisal

What Happens if My Home Appraised Lower Than the Purchase Price ...

A low appraisal can throw a wrench in your home-buying plans. Here are some common reasons why an appraisal may come in low:

  • A changing market: A fluctuating real estate market makes an accurate appraisal difficult. If theres been a recent shift in the market, appraisals may not line up just yet.
  • Inexperienced appraiser: A new appraiser might not have a full grasp of the market.
  • Inaccurate comps: If the comparable properties arent similar enough to the property being appraised, then an appraisal could be way off.
  • Missing information: An appraiser that underestimates square footage or doesnt take recent upgrades into account will arrive at a lower value.

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What Does It Mean When The Appraisal Doesnt Match Your Offer

When buyers and sellers come to an agreement on the price of a home, its the end result of the lowest the seller is willing to accept and the highest the buyer is willing to pay. During negotiations, the offer and counteroffer can go back and forth until an agreed-upon price is reachedor not. Thats the true market value at work.

When you first work with your real estate agent and go over the list of things you want in a home such as how many bedrooms/bathrooms, location, and price youre provided with a list of homes that meet your criteria. But finding the right home at the right price begins with knowing what you can afford.

The first step is to get a pre-approval letter from a mortgage lender. A mortgage pre-approval based on your income and expenses gives you the home buying budget you need. Your preapproval letter essentially means your financing is all lined up and all thats missing is a property address.

Sometimes, and this is often the case with first-time buyers, the perfect home comes on the market and has everything the buyers are looking for. In their eagerness to get the home and be the lucky bidder, they might make an offer thats over and above the asking price. And while the sellers are happy to take that offer, there might be an issue with the appraised value.

How A Low Appraisal Affects Buyers

As an investor, you can still decide to buy the property even if the appraisal is lower than the purchase price. For example, you may believe the long-term true value of the property is greater than the appraisal due to factors such as a soon-to-be improving economy or strong future population growth.

However, if youre financing, you may need to put more money down if the appraisal comes in low. Thats because the lender will calculate the loan-to-value based on the appraisal value and not the purchase price.

Lets say you and your lender have agreed to a conservative LTV of 75%, with you making a down payment of 25%. Your purchase price on a single-family house is $100,000 but the appraisal came in low at only $80,000. If you decide to proceed with the purchase, youll need to come up with more money than anticipated:

  • Purchase price = $100,000 x 25% down payment = $25,000 total cash down
  • Appraised price = $80,000 x 25% down payment = $20,000 + $20,000 difference between purchase and appraised price = $40,000 total cash down

If you dont want to pay more for the property than the appraised value, there are three approaches you can take as a buyer:

  • Negotiate with the seller for a lower offer price.
  • Buyer and seller mutually agree to extend the contract appraisal contingency clause to allow time for second appraisal.
  • Buyer unilaterally cancels the contract using the appraisal contingency clause, and receives a full refund of the earnest money.
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    What Is An Appraisal Contingency

    An appraisal contingency clause is included in purchase contracts that allows buyers to back out of a deal if the home appraises for less than the purchase price agreed to with the seller. They are usually inserted into contracts by buyers who are financing the home purchase, or are buying homes in areas where real estate prices often fluctuate.

    What To Do Next As A Seller When The Appraisal Comes In Low

    What happens if appraisal is lower than offer? The appraisal gap clause explained

    Just as the buyer feels deflated by the news of a low appraisal, no seller wants a deal thats so close to the finish line to fall through either. So what can you do as a seller to ensure you get a fair price and keep the deal on track?

    The first thing you should do is engage your real estate agent. They are your advocate in this transaction and should help figure out the best plan of action for how to move forward past a low appraisal.

    Then youll want to review the purchase agreement. If there was an appraisal contingency agreed to, your best bet is to negotiate with your buyer to either lower the price or come to an agreeable solution. This ensures the sale can move forward so that you dont have to go back to square one with putting your home back on the market.

    You should also check if a second appraisal can be requested. There are some scenarios when a second appraisal can be ordered, but youll need to work with your listing agent, and your buyer will need to coordinate with their loan officer to determine if this is a viable option.

    A low appraisal can feel overwhelming to deal with and is disappointing news to hear when youre feeling so close to getting into your new home. The most important thing to remember is that you have both your buying agent and loan officer on your side. They are there to be your advocate and make your homeownership goals become reality.

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    How Do Appraisals Come In Low

    Understanding the appraisal process and the why behind it still doesnt explain how one can come back lower than the purchase price you agreed to as a buyer. And if youve just found out yours has come in below your contract price, you will want to know why.

    Theres typically not one definitive answer because of the many aspects of the home appraisal process. But, these are some typical contributing factors to low appraisals:

    • Comparable Home Sales in Your Neighborhood. A large part of the formula for calculating your prospective homes value is comparable sales that have closed recently in your area. Its important to note that comps must be completed transactions and not other properties active on the market.
    • Lack of Comparable Properties Nearby. This is typically a more significant contributing factor in rural areas where there may not be similar homes to yours.
    • Foreclosures and Bank-Owned Sales Nearby. If these are included as comps, they can drive down the value of your appraisal.
    • High Expectations. Its important to take a look at what has actually sold in your area and whats been on the market longer than average. By digging into your local home sales data, youll be better prepared for what to expect regarding your home valuation.

    Shift Some Down Payment To Make Up The Difference

    Lets say the buyer was planning on putting $60,000 down on a $300,000 home . If the appraisal comes in $10,000 low, the buyer could shift $10,000 of the money theyve set aside for their down payment to make up the difference.

    The downside is that theyll be putting less than 20 percent down and will have to pay private mortgage insurance every month until their equity in the homes loan-to-value ratio is 20 percent. Of course, this arrangement is subject to the buyers lender approving the smaller down payment and greater loan amount.

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    Is It A Good Idea To Buy A Home In 2022

    If you are considering buying a home in the current market conditions, it might be a good idea. But that depends on your situation.

    For potential home buyers that have saved for a down payment and built a good credit score, buying a home in 2022 offers the opportunity to lock in relatively low mortgage rates.

    But if your finances arent ready for homeownership, then 2022 is not the right time to buy a home. The current market is very competitive and may be a bad match for anyone whos not financially prepared for this major step.

    Property Inspection By The Appraiser:

    Appraisal Came Back Low : If a compromise cannot be reached or the ...

    The inspection of the property will take anywhere between 5-20 minutes. The inspector may ask questions regarding the age, recent updates and renovations, the age of key items like the roof, and strata related questions if applicable. The appraiser will usually take photos of the interior and exterior as well for their report.

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    Renegotiating The Purchase Price

    In many cases, a seller may realize that it will be tough to find a buyer to purchase a home for more than it is appraising for, and might be willing to renegotiate the selling price with you. Theres quite a bit of paperwork involved, but it can be accomplished. However, sometimes when you get a low appraisal the seller wont budge on their price. This commonly happens if the seller is being advised by their agent not to be concerned about finding another buyer at the price they are asking due to the market being competitive, they may be confident and not want to budge off their asking price.

    Having both real estate agents involved in the deal compile a list of all of the recent comparable sales can help justify either the asking price or the renegotiate price and appraisal.

    Keep in mind that many factors will come into play when it comes to whether or not a seller is willing to come down in price. It will depend on how eager they are to sell the home and how likely they think it will be that they will find a buyer willing to pay the price they are looking for.

    Sometimes, if the seller is unwilling to budge and come down to the lower appraisal number, they may meet you in the middle, leaving you with a lot less cash to come forward with if you decide to pay the difference.

    What Happens When The Appraised Value Is Higher

    When appraising a property for a purchase, its common for the sales price on the contract to match the appraised value. After all, everything being equal, its an agreed-upon price which in turn reflects current market values.

    But sometimes they dont match. Sometimes the appraised property value is higher than what appears on the sales contract and sometimes the property is appraised at a lower value.

    During the course of a refinance when the value comes in higher, it can mean a slightly better interest rate if the loan program being selected is priced partly on the loan amount compared to the property value. Mortgage Lenders refer to this as a loan level pricing adjustment. Or, in the instance of a cash-out refinance, a higher appraised value can mean more cash to the buyers at closing

    In a purchase transaction, a higher appraised value doesnt have much of an impact. When evaluating a loan application, lenders will use the lower of the appraised value or sales price. This means when the value comes in higher than the contract price the buyers cant automatically use that newly found equity as part of their down payment.

    All it says is that the buyers probably got a better deal than they thought as their accepted offer was lower than what similar homes have recently sold for in the area. In the instance of the appraised value coming in lower than the offer, then the impact is greater.

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    Are Appraisals Keeping Up With The Market

    When home prices are moving fast, it can be difficult for appraisals to keep up. According to the Wall Street Journal, many homes appraisals are not keeping up with the market.

    However, it really depends on your location and the appraiser you get. In some cases, appraisers are keeping up with the housing market.

    What To Do If The Appraisal Comes In Low

    Appraisal is Lower Than Offer What Now?

    Weve talked about the good news, so now its time to talk about what happens if the opposite occurs. If your appraisal report comes back and the amount is lower than the homes purchase price, youll have some .

    Remember, lenders will loan you either the loan amount or the appraisal amount, whichever is lower. So youll need to address this difference, also called an appraisal gap.

    Taking the $200,000 purchase price example above, if the appraisal values the home at $180,000, then suddenly you will either need $20,000 extra to cover that appraisal gap or, youll have to ask the seller to lower the purchase price of the home so that you can move forward with the deal.

    Here are a few options to consider if the appraisal comes in low.

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    Who Pays For The Mortgage Appraisal & How Much Is It

    An appraisal is hired by the lender, but typically paid by the buyer. An appraisal is typically $350-500.

    However, this depends on whom the buyer is using for their mortgage. It is common for the Big 5 banks in Canada to pay for the appraisal, and some mortgage brokers may also cover this bill as a part of their service.

    Other Ways To Determine Property Value

    There are three other ways real estate investors can determine property value. Although theyre not a substitute for a paid property appraisal by a licensed professional, they are absolutely free and can provide a fairly accurate idea of most property values:

    • Comparative market analysis using data from the MLS, Zillow, and the Roofstock Investment Property Marketplace
    • Broker price opinion performed by a licensed real estate broker or agent combining data from the MLS along with the agents detailed knowledge of the local real estate market

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    Low Appraisals In A Hot Market

    Due to increased demand and low real estate inventory, most parts of the U.S. are currently in a sellers market. This is great news if youre trying to sell a home, but not so good for buyers.

    Several things can happen in a sellers market to impact home buyers. Sadly, most of them arent in the buyers favor.

    Low appraisals are a common side effect of a sellers market. But just because an appraisal came back lower than you were expecting doesnt mean you cant still qualify for the home.

    In fact, there are plenty of actions you can take if an appraisal comes back low.

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