What to do if an appraisal came in low
Whether you are buying a home or selling a home, it can cause some major anxiety when an appraisal comes in under what was expected. It is not, however, terribly uncommon to get a appraisal that comes in low. In fact, according to the December 2018 REALTORS Confidence Index Survey 17% of problems related to contracts were from appraisal issues. What should you do if your appraisal comes in low?
How do low appraisals happen?
It can be a real disappointment if you make an offer on a home that you love and then the home appraises under what the offer price is. Here are some reasons why low appraisals happen:
- In a hot market where few homes have sold, there may not be recent sales that reflect the current state of the market
- In markets where a lot of foreclosures and short sales are happening, it may drag down other home values
- If there was a bidding war on the property, this may artificially drive the price up above comparable homes
- If the home is larger or has more expensive features than surrounding homes, this can cause it to appraise low, as there aren’t suitable comparables available
- If a home is on the market during a downturn, the list price of the home may be above where the market ends up, resulting in a lower valuation
- The appraiser or underwriter makes a bad evaluation
How could a low appraisal affect you?
If you are buying a home, the main way a low appraisal can affect you is by not receiving a large enough mortgage for your needs.
Typically, for a mortgage that requires a 20% down payment, banks lend to buyers 80% of the appraised value of the home. So, if your appraisal comes in low, you will need to come up with the difference in order to bridge the gap.
If you are buying a home all in cash, the appraisal won’t necessarily matter, as you don’t need a bank to provide a loan.
What to do if your appraisal comes in low
Many appraisals come in low. It is by no means uncommon. You do have several options available to you:
Put more cash down
You can make up the difference in a lower appraisal by increasing your down payment to cover the gap between what the bank will lend you and the purchase price.
Ask the seller to lower the price
Particularly in less competitive markets, you can go back to the seller and request that they drop the price in order for you to secure financing. If the appraisal comes in low for you, the chance is good that it will also come in low for another buyer and they may wish to simply get the deal done.
Dispute the appraisal
You can go back to your lender with comparables in order to make the case for a do-over of the appraisal, if it seems clear that there was an error on behalf of the appraisal company. You can submit a list of comparable sales in the area to strengthen your case.
Pay for a second appraisal
In the event that the lender does not wish to order a second appraisal, you can order an appraisal at your own expense, or share the expense with the seller. An appraisal costs around $300 to $500.
Cancel the purchase
According to the REALTORS confidence index survey from December 2018, 74% of contracts had contingencies, and of them, 42% had contingencies related to the appraisal and 45% of them had contingencies related to financing (another big one is inspections). A financing contingency can overlap with appraisal contingencies, simply because a low appraisal can create problems with financing. If your contract has these contingencies, you can simply decide to cancel the purchase and exit the contract.
You don’t have to let a low appraisal ruin your plans to buy your dream home, but you do have to make some tougher decisions. Most of all, make sure that your contract has contingencies that protect you in the event that you do have appraisal or financing issues. If you don’t have these contingencies, you’ll want to know your options for how to get out of a real estate contract.