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Dealing with a Low Appraisal

In sellers’ markets, multiple offer situations often drive up the purchase price higher than any comparable sales in the area, so sellers worry the appraisals will come in low. In buyer’s markets, when prices are soft or falling, sellers are also concerned that the home will bring a low appraisal. Low appraisals can happen in any marketplace: hot, cold or neutral.

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 (the seller’s lender is accepting a discounted payoff to release an existing mortgage) in the neighborhood, especially when no other comparable sales exist.
  • 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.

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, 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.

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.

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