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Coping with a Low Home Appraisal

If you are fortunate enough to be selling in a seller's market, you may find that you have a problem you must cope with; a low home appraisal. This can sometimes happen when there are multiple offers that drive up the purchase price so that it is higher than area comparable sales. If you're selling in a buyer's market where the prices are falling you may still have to be concerned about a low home appraisal. There can actually be many reasons why an appraisal could come in lower than expected. One reason could be due to declining market values in the area as a result of a lower number of buyers. In addition, numerous short sales or foreclosures in the local market could also contribute to a low appraisal, particularly when there are few or not comparable sales. Other potential contributing factors to a low appraisal include overpricing, an incorrect evaluation from the underwriter, an appraiser who is not experienced enough to understand the factors that can influence value and an appraiser who may not have reviewed pending sales data.

Regardless of the reasons for a low appraisal, both buyers as well as sellers should know there are steps they can take to combat this problem if they find themselves coping with a low appraisal. One option would be to have the buyer to make up the difference between the appraisal and the sales price in cash. In this type of situation the lender is only concerned with the appraisal in terms of the loan to value ratio. Just because there is a low home appraisal that does not mean that the lender will refuse to make the loan. It does mean that the lender will only be able to make the loan based upon the ratio which was agreed to.

Another option would be for the seller to lower the price. In the event the value of the home was inflated or the home was overpriced, this is typically the best solution to a low appraisal. The buyer will certainly be happy and it will satisfy the lender. Sellers who are reluctant to lower the price should remember that even if the buyer walks out on the deal, there is no guarantee that they won't receive a low appraisal from a second buyer as well. That is not even taking into account the frustration and time involved in trying to get another contract on the house. It may very well be better to lower the price and go with a contract when you have one.

A third option allows the seller to carry a second mortgage for the difference between the appraisal and the sales price. This is a good option for a very interested buyer who is not able to come up with the cash difference. In this case the buyer would make a lump sum payment later or possibly make payments, depending upon the agreement made between the parties.

Buyers might also think about ordering another appraisal. Sellers can also offer to pay for a second appraisal as well if they want to proceed with the existing contract and paying for another appraisal would be a hardship for the buyers. In some cases, this can do the trick as a second appraisal may come in higher than the first appraisal, particularly if there is a suspicion that the first appraiser made mistakes or was inexperienced.

In addition, buyers should also keep in mind that if they discover an out of town appraiser is being used, they do have the right to request that a local appraiser be utilized who may be more familiar with local sales data and comparable sales. It can also be helpful for real estate agents involved in the situation to compile a list of comparable sales that will help to justify the price that has been agreed upon. That information can then be submitted to the loan underwriter and a request made for the appraisal to be reviewed.

Finally, it is possible for the transaction to be canceled. In most circumstances, the purchase contract will contain a contingency stating that if the appraisal should come in low, the transaction can be cancelled. In this case, the seller would be required to release the buyer's earnest money and both parties would be released from the contract. While this is certainly not the most ideal situation, if you have tried other options and have still not been able to arrive at an agreed upon solution for all parties, you may find that this is the only workable solution.



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