What are my options if the house I’m buying doesn’t appraise?
What happens if you are under contract to buy a house and the appraisal comes in low? You’ve completed your inspections, and all went well. Repair issues have been worked out with the Seller. You’ve applied for your mortgage. During this process, your lender will order an appraisal of the house. They want to be sure of its value before loaning you the money.
Usually when the appraisal is done, either the listing agent or the buyer’s agent involved in the transaction will meet the appraiser with comps – comparable sales in the neighborhood to substantiate the sale price. This helps, particularly if the appraiser is from the area.
WHAT IF THERE IS A SHORTFALL IN THE APPRAISAL?
The appraisal comes back and it’s low. In other words, the house does NOT appraise for the selling price. Now, there is a shortfall between what the bank is willing to lend you and the sale price. For example, let’s say the sale price of the house is $ 400,000, but the appraisal comes back at $ 375,000. There is a shortfall of money that needs to be made up somehow. If you are going for a conventional loan with 80% down payment, the lender will only lend you 80% of the appraised value. In this scenario, they will only lend 80% of $ 375,000, not $ 400,000.
Someone has to make up the difference. Where is the other money going to come from? The bank has a vested interest in your home. They want to know the house is worth what they’re lending you money for.
DIFFERENT OPTIONS IF THE HOME APPRAISAL COMES IN TOO LOW
1. REQUEST A SECOND APPRAISAL
If you know the area you are buying in well, and honestly feel the appraisal is too low, you may dispute the appraisal and request a second appraisal be done. You will likely have to pay extra for it, but it might be worth it in the long run. This can happen if the appraiser who did the first appraisal is from out of the area. Often, when this happens, the appraiser may not be familiar with a certain section of a community or subdivision that consistently sells for more. Again, this is where comparable sales play a key
Sometimes there may be no recent comparable sales. Then the appraiser has to go out of the community or subdivision to a similar community or subdivision to get recent sales.
This happened to me recently with a house in the Boca Del Mar neighborhood in Boca Raton FL, which has many subdivisions. Although square footage in the subdivisions can be similar, certain sections always sell for higher prices. Those who live in Boca Raton Florida know that, but an appraiser who came from out of the area did not. As a result, we had to request to have a second appraisal done, which the bank agreed to. The Buyers had to pay for it, but gladly did so knowing the value of the home they were buying.
A Seller may have done their own appraisal prior to listing and think their house is worth X dollars. Unfortunately, that won’t fly with your lender. The honest truth is that you can have three appraisers appraise the same house and come up with three different numbers. Besides, home prices change over time, and if that appraisal was done three to six months prior, it’s outdated. Your lender will not use it.
Another option is for the Buyer and Seller to renegotiate the price. Seller may be willing to take less to get the house sold. Or, the Buyer may be willing to pay more out of their pocket because they want the house badly.
In the scenario above, the Seller thought they were getting $ 25,000 more. They may be willing to sell for less. We may not know their motivation. They may accept the appraised value as the new sale price. It doesn’t hurt for the Buyer to go back and try to renegotiate a lower price. You never know. On the other hand, the Seller may not be willing to go to the appraised value, but they may be willing to come down some in price. Ask!
3. SPLIT THE DIFFERENCE
You can offer to split the difference of the shortfall with the Seller. So you would be paying an additional $ 12,500 in the example above, and Seller would be accepting $ 12,500 less for his house, or whatever percentages you work out.
If the Seller does not want to split the difference, maybe they are willing to take $ 10,000 off the price. That would leave you with having to come up with an additional $ 15,000 in the above scenario, not $ 25,000. You can try different options with numbers here.
4. PAY THE DIFFERENCE
If you’re in a Sellers’ market with a shortage of inventory, and you have the extra money at your disposal, you may just decide to pay the difference. Many Buyers don’t want to lose the house. You have already paid for inspections. Time is marching on and you want this house. So, the lender will lend you 80% of $ 375,000 in the above example and you will come up with an extra $ 25,000 to secure the house.
If you cannot come up with the extra money, talk to your lender. They may have a different mortgage program that may work for you where you can put down less money freeing up some extra cash. Of course, you need to get the Seller to agree, but it never hurts to ask.
5. LAST RESORT
Your final option is to walk away from the house. In Florida we have an appraisal contingency built into our FAR BAR As-Is Contracts (Florida Association of Realtors and the Florida Bar) and one can always be added, as well. So, if you cannot come to a meeting of the minds, you may walk away from the house without losing your deposits should the house not appraise for the sale price.
This should always be a last resort because of the time, effort and money you have already invested in this house. It’s always best to try and work it out between the parties. Then it becomes a win-win situation for both Buyer and Seller, and everyone walks away with what they want – Buyer gets the house and Seller gets their money.
FINAL THOUGHTS ON APPRAISALS
If the house appraises higher than the sale price, you don’t have a problem (in fact, you found yourself a good deal). Your lender will proceed with your mortgage as planned. However, sometimes things don’t always work out as planned and you need to be prepared, especially in a Sellers’ market with low inventory where houses may be sold for more than asking price. This may or may not present a problem with your appraisal.
The key is to be prepared and know your options. Talk to your lender. Talk to your buyer’s agent. And know your finances.
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What are my options if the house I’m buying doesn’t appraise?