Why Do Low Appraisals Happen?
There are a number of reasons why appraisals come in low. Here are a few:
- Artificially inflated prices resulting from multiple offers.
- Declining market values due to fewer buyers shopping among a larger inventory of homes.
- Fallout from an abundance of foreclosure or short sales in the neighborhood, especially when no other comparable sales exist.
- Incorrect evaluation by the underwriter.
- Overpricing by the seller.
- Inexperienced appraiser who doesn't understand influences on value.
- Appraiser overlooked pending sale data, which could reflect higher comparable sales when closed, or the appraiser selected comparable sales from the wrong neighborhoods.
- Buyer receives cash back from the seller, causing lender to believe the price has been inflated.
One factor that does not come into play is whether the lender wants to make the loan. Lenders want to lend money, and lenders are prohibited from redlining.
Solutions for Low Appraisals
Don't panic if the appraisal comes in low. It's tough to remain calm when it appears the pending sale will fall apart, but both parties have options:
- Buyer can make up the difference in cash.
The lender cares about the appraisal only to the extent it affects the loan-to-value ratio. A low appraisal does not mean the lender won't lend. It means the lender will make a loan based on the ratio agreed to in the contract at the appraised value.
- The seller can lower the price.
If the home was overpriced or the value was inflated, often this is the best solution. It makes the buyer happy and the lender is satisfied. There is no guarantee that if the buyer walks away, the seller won't receive a low appraisal from the second buyer's lender, not to mention the time and trouble it takes to sell the property again. Sometimes a bird in the hand is best.
- The seller can offer to carry a second mortgage for the difference.
If the buyer really wants the home but cannot come up with the difference in cash, making payments or a lump sum payment at a later date to the seller is an option. After the escrow closes, sellers often retain the right to discount the second mortgage, sell it for less than face value to an investor.
- Order a second appraisal.
First, if your loan is an FHA loan, ask the lender for a list of approved appraisers. Either the seller or the buyer can pay for the second appraisal. Sometimes the second appraisal will come in higher than the first, especially if the first appraiser was inexperienced or made mistakes.
If your loan is a conventional loan, then it is subject to the rules of the Home Valuation Code of Conduct (HVCC). Barb Torres, an accredited senior appraiser says, "As soon as the parties find an appraiser is coming out who is not familiar with the local market, they have every right to contact the lender (preferably in writing) to DEMAND a local appraiser be used."
- Supply a list of comparable sales.
Ask the agents involved to put together a list of recent comparable sales that justify the agreed-to sales price. Submit that list to the underwriter and ask for a review of the appraisal. Also, ask the agents to call the listing agents of pending sales to try to find out the actual sales price of those properties. Listing agents do not have to disclose the sales price, but many are happy to help out because they could find themselves in the same situation. You can always ask if the agent thinks your price will appraise if the agent refuses to divulge the pending price.
- Cancel the transaction.
Many purchase contracts contain a loan contingency. If the appraisal comes in low, the buyer does not qualify to buy the property at the agreed-to terms in the contract. A properly written loan contingency allows the buyer to cancel the contract and requires the seller to release the buyer's earnest money deposit.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.