When The Appraisal Comes In Low

When you buy or sell a home, and a mortgage lender is involved, an appraisal is required. The appraisal is an estimate of a property’s value and is required by the lender to make sure that the value of the home is in line with the loan they are offering. A home appraisal is conducted by an appraiser contracted by the lender, and the purpose is to protect the lender’s investment. It is important to note that the appraiser may not be contacted/influenced by outside parties in order to adjust the appraisal price they have determined. A lender only loans money based upon the valuation of the appraisal. The value of a home is based upon several factors including neighborhood, features, condition of the home and nearby recent sales comps. Appraisal price (what a third party appraiser deems the price of a home) is different than market value (which is the price that the home will sell for on the current market). In hot markets with multiple offer situations, it is not uncommon for the purchase price to be higher than the appraisal. When the appraisal comes in low, there are a few different options for moving forward (or walking away.)

Appraisal Contingency

In Texas, the Third Party Financing Addendum, promulgated by the Texas Real Estate Commission (TREC) stipulates that a property must meet the lender’s requirements for underwriting and appraisal to be approved for a loan.  This is a built-in appraisal contingency for any purchase agreement with a financing contingency. If the appraisal comes in low and the lender will not approve the property, or you simply don’t want to pay more for a home than it is worth, you are able to walk away and retain your earnest money. 

Ask For A Reduction In The Purchase Price

If the appraisal comes in significantly lower than the purchase price, the seller may be willing to adjust the price to meet the appraisal. This does not apply to all markets, though. In a hot market with growing and developing locations, it is likely there are other buyers lined up to purchase the home at asking price. It is even likely that the home may appreciate quickly and the variance isn’t a problem. In a stable or declining market, where property values are not projected to increase, a seller is likely to consider working with a buyer on a low appraisal. 

Pay A Larger Down Payment

In a competitive, multiple offer, developing market many buyers may choose to pay the difference between appraisal and purchase price, by putting more down. The lender will provide a loan up to the loan valuation amount based upon the appraisal, and at closing the buyer pays the difference.  Keep in mind, some lenders will still withhold financing even if you are willing to pay the difference. 

Waive The Appraisal Contingency

In a hot market with multiple offers, many buyers waive the appraisal contingency to sweeten their offer. This buyer is guaranteeing they will make up the difference with a larger down payment, and not walk away. If one of these buyers is your competition in a developing neighborhood, odds are the seller will choose this buyer and their offer. If they do select a buyer with an appraisal contingency, the seller probably will not agree to lower the purchase price later if the appraisal comes in low. By having your REALTOR® perform a Comparative Market Analyis (CMA) upfront, you can get a general idea of where the home may appraise, and determine if you have sufficient cash available to pay any difference. Before you make an offer without an appraisal contingency, talk with your lender to make sure they’ll still issue a loan on the property. 

What If The Home Appraises For Over The Contract Price?

For a buyer, a home appraisal at above the contract price is worth celebrating! Your REALTOR® negotiated a price that is less than the home is worth and you got a deal! The seller is selling the home for less than the market shows it is worth; so, you shouldn’t disclose to the listing agent or the seller the appraisal value. An unscrupulous seller may attempt to derail the sale; so, they can find a new buyer at a higher price. Texas is a non-disclosure state and you are not required to share with anyone the appraised value of your home! Keeping this information private may help protect you when the appraisal district assesses your home for property taxes. 

Do you have questions about appraisals or want to learn more about buying and selling homes. Contact Angel today to get started!