4 Steps To Take After After A Low Appraisal Of Your Home

November 11, 2022

You're trying to sell your home in a competitive market, and you've secured an excellent offer from a reliable buyer, but the property appraises for less than you'd hoped. The buyer may suddenly lose interest or faith and realize they can't afford the house after the assessment, even if they could have afforded it previously.

If your house appraised for less than the offer, you can either renegotiate the sale price with the buyer or scrap the deal altogether. 

The high stakes of this problem might make settling on one course of action difficult. Talk over your options with your broker, and rely on their guidance and knowledge.

What Is An Appraisal?

If you want to know how much your home is worth, you should get an appraisal from a certified professional who will base their estimate on previous sales of similar properties in the area. Lenders often request appraisals on behalf of their borrowers as a precautionary measure. The amount of money a bank is prepared to offer a buyer as a down payment sometimes depends on the results of a home appraisal. The appraisal for a buy mortgage serves to either confirm or establish the loan-to-value ratio (LTV).

A lender is ready to guarantee substantial expenditure by the buyer, so it must prepare for the worst. What this implies for them is wondering what steps might be taken to recover their capital in the event of a borrower default. Checking the property's value against the loan amount is a key part of the solution. 

The buyer and the lender place a high value on the appraisal results. This prevents them from taking on unneeded debt and investing more money than the property is worth. Furthermore, it safeguards their interests when the time comes to sell. A buyer who pays more than an assessment suggests for a home will have a tough time breaking even and can forget about earning a profit later on down the line.

You may be wondering why this matters to you as a property seller. Refusal to work with or accept the services of a professional appraiser will immediately raise red flags with any prospective buyers.

Try to see things from the buyer's perspective and drop your defenses. Keep in mind that appraisers are objective experts. They safeguard the lender, while the buyer benefits from their efforts. 

Do not try to appraise your house on your own before putting it up for sale. It is wise to get an appraisal before determining a home sale price, but you shouldn't include one in the purchase agreement unless the buyer specifically requests one.

Buyers are naturally skeptical, so they may suspect the seller of pressuring the assessor to provide a greater value than reasonably justified. Also, the buyer's lender probably won't accept the seller's evaluation and will insist on commissioning its own. 

How Do Appraisals Work?

Your best bet is to learn as much as possible about appraisals since they affect the success or failure of a deal. 

The assessment is conducted by a qualified professional appraiser hand-picked by the lending institution. Appraisers should not have any vested interest in the sale's final price to provide a fair and impartial evaluation. The appraiser's selection is made independently of the buyer and seller.

Real estate appraisers consider comparable properties that have recently sold in the area. The appraiser may better understand the home's worth by comparing it to similar properties in the area.

Appraisers document the house's inside and exterior using photographs, making special note of any changes or additions that increase the home's worth. Additionally, they note any parts that need to be replaced or fixed. When the appraiser has finished their inspection, they will look at comparable homes for an accurate value. In the case of a three-bathroom four-bedroom home, for instance, the appraiser would look for properties with identical square footage and amenities.

The final product of the appraiser's efforts is a report that includes their expert opinion on the property's worth based on their thorough investigation of all relevant factors. It usually takes a few days to weeks to complete an assessment report. A copy of the appraisal report is given to the lender and the buyer. After considering the appraisal's quality, the lender will either proceed with the loan process or order a second appraisal. 

How Do Appraisers Determine How Much Your House is Worth?

Many factors go into establishing a property's worth, and an appraiser will evaluate them all. These include recent transactions in the neighborhood, the property's current condition, and any unique amenities or characteristics.

For example, if the property needs renovations or is in an unattractive area, the appraiser will consider it. The appraiser will next give a written report outlining their findings. Lenders will use this report to decide how much they will loan for the property. All parties will use it as a reference point while haggling over the final sales price.

What Happens If A House Does Not Appraise: Buyer Options

The buyer will be in a bind if the appraisal is lower than the purchase price. Say a buyer finds a house they like and offers $350,000 on it. Their offer is accepted, and now they can't wait to start packing for their upcoming move.

But…the appraisal comes back and that house they just agreed to purchase? It’s only worth $300,000. In this case, they have a couple of options. 

The most favorable scenario for the buyer would be if the seller reduced the purchase price to $300,000, in line with the property's assessed worth. The worst-case scenario, on the other hand, would be if they agreed to pay $350,000 for the house plus a down payment of $50,000.

When a house doesn't pass appraisal, parties usually come to an agreement. Possible settlement terms: the buyer pays $20,000 down, and the seller accepts $330,000. Simply said, the sales price and the assessed value are negotiated to converge at a middle ground that both parties can live with.

The buyer might pull out of the deal as a last resort. When using a third-party lender, the buyer is given an "exit" from the purchase contract without losing their earnest money deposit if the property fails the appraisal. However, a buyer cannot cancel a home purchase agreement because of a low appraisal if they sign a particular amendment to the contract waiving their right to do so.

What Happens If Property Does Not Appraise: Seller Options

  1. Negotiate the offer - Identify a mutually agreeable price that accounts for the difference between the appraised value and the asking price. Sellers might attempt to negotiate a fair price by imagining themselves in the buyer's position. The seller can lower the listing price until it aligns with the property's assessed worth. The seller and the buyer can also agree to postpone the home's appraisal contingency so that a fresh appraisal may be conducted. This way, the buyer won't feel like he's overpaying, and the seller won't have to lower their asking price to meet the lender's minimum
  2. Request a rebuttal - You, as the seller, may be able to fight against the appraisal figure if you and the buyer have disagreements about the home's value. These appraisal rebuttals seldom succeed, so if you have any evidence that might sway the appraiser in your favor, be sure to provide it. Proof might consist of things like enhancements you have made to the house that a computerized assessment would not pick up on. If you believe your house's worth has increased due to recent upgrades, you should request the services of a human appraiser. 
  3. Move forward - However, the buyer must know that the difference between the contract price agreement and the appraisal will need a larger down payment. Your realtor should be able to use comparable sales to persuade the buyer that the property is worth the listing price so that the buyer will not back out of the transaction, and you will be able to collect the difference in a cash offer.
  4. Cancel the contract - Once all other possibilities have been explored and rejected, this is the only thing left to try. If you're selling in a hot market, you should stand firm on your asking price and wait for the market to catch up and not entertain negotiations with the buyer anymore.

How To Avoid A Low Appraisal In The Future

  1. Don't overprice your home - It's easy to get caught up in the headlines about the real estate market in places like Austin and San Francisco and think, "I’ll just ask for $50,000 more!" Set a fair home price. Don't get carried away and charge a higher price. Find a reasonable price with some wiggle space for either side.
  2. Hire an experienced real estate agent - If a real estate agent has worked with appraisers before, they will have a deeper understanding of the appraisal process. They can inform the appraiser of the multiple offers on your home, supply comparable sales data to back up the sales price, arrange for the appraiser to visit your property, create a detailed MLS listing on your behalf, and assist you in drafting a contract a buyer may agree to acquire the house despite the low assessment value.
  3. Ask for a pre-appraisal - Appraisers sometimes have to travel outside their normal service area, which might result in a lack of familiarity with local market trends and comparable sales data. An appraiser who isn't up-to-date on the market may be assigned to you. It's a good idea to be armed with a pre-appraisal because this will tell you whether you're in the right ballpark when you put your house for sale and can be used for disputes (hopefully not!). Typically, you won't have any say in which appraiser comes to your house. But the best appraisers make an effort to consult with one another when they encounter an unfamiliar area. In this case, it might also be beneficial to inquire whether your appraiser is acquainted with the community or has any connections that may help them with the process.
  4. Run comps of your neighborhood - A comp is a comparable sale in real estate. As the idea goes, one way of accurately determining your home's value is by looking at previously sold properties comparable to yours. From there, value your house by adjusting the asking price up or down to account for improvements or repairs. Bring it to the lender's attention if a comparable house in the area recently sold for more than your appraisal, mainly if the transaction took place after your appraisal

What If Appraisal Is Lower Than Offer

Even if the appraisal came in low, it doesn't always imply that the transaction will fall through. The opposite is usually true. In the home buying process, this only means that you and the home buyer must be adaptable and creative in finding solutions.

Potentially walk away from the deal if the buyer doesn't dispute the evaluation or is uninterested in negotiating. You could find another buyer, but you'll still be stuck with the same problems if you walk away now.

If you, the seller, decide to back out of the agreement, you may want to wait until the market improves or shifts back to a seller's market before relisting your house. In the event that you received more than one offer, it is time to revisit your stack of proposals. It's possible to locate a buyer who is prepared to pay the full asking amount.

 

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