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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