There’s no worse feeling than getting the appraisal back on the home you contracted to buy only to find out it’s worth less than you thought. Before you start worrying that you’ll have to ditch your dream home, read on to learn just how you can deal with this bad news.
Why do Low Appraisals Happen?
You might count on the fact that the seller knows what their home is worth. You assume that the appraisal will come back at the price or even higher than the price you offered. Sometimes, that’s not the case though and it could be for several reasons:
- Bidding wars – When there is high demand for a certain house, it can quickly drive the price up. Before you realize it, you’ve bid higher than the home is worth.
- Low demand – On the opposite end of the spectrum, a low demand in the housing market can lead to lower values. When there’s a lot of homes on the market, but no one buying them, the values tend to drop.
- Bad timing – If there was an influx of foreclosures or short sales in your area recently, it can bring the value of the home down.
- Difficulty finding comparables – If there has not been a lot of activity in your area, the appraiser might have a hard time finding appropriate comparables.
What Can You Do With a Low Appraisal?
While it might seem worrisome that the home’s value is lower than you thought, you have options. First, you should know that the lender cannot lend you more than the home is worth. So there is a problem. But there are ways around it.
- Make up the difference in cash – If the difference isn’t too much, you can make it up in cash. Let’s say the appraisal came in $2,000 less than the purchase price. You can pay the difference. The lender must use the appraised value as its frame of reference for the LTV. For example, if the purchase price is $200,000, but the appraisal came in at $198,000 and the lender can give you a 95% LTV, they can lend you $188,100 rather than $190,000. You would have to make up the difference of $1,900.
- Renegotiate the sales price – If the seller is willing, you can work out a lower sales price with him. This most commonly occurs when the seller knows the purchase price was inflated. The seller will likely be happy to sell the house at the price he expected. It was a bonus to get the higher price, but since you can’t get funding, he will either lower the price or run the risk of losing the sale.
- Meet the seller halfway – If the seller isn’t willing to budge on the price, you can ask to meet him halfway. If you put half of the difference in cash and he lowers the price the other half, you each paid your dues to get the loan closed.
- Contest the appraisal – If you feel that the appraised value isn’t right or fair, you can contest it with the appraiser. He must then go back and determine if he still stands by the value he came up with. You can provide the appraiser with any proof you have that the value should be higher. A few examples include different comparables or inaccurate adjustments for certain features of the home.
Should You Accept a Low Appraisal?
The bigger question is whether you should even deal with a low appraisal. Typically, it’s not the end of the world because the difference isn’t too drastic. It could be a difference of opinion on comparables or even the home’s features. However, if the difference is too stark, you may want to look elsewhere. Another red flag is if the seller doesn’t want to budge. Do you really want to invest more of your own money into the home at an inflated price? You might be better off finding a home that costs what it is worth rather than starting upside down on the home.
Whether you should accept a low appraisal or not is a personal decision. Weigh all of your options and see how the seller reacts to the news of the lower value. Hopefully, you have a seller that is willing to cut you a deal and only charge you the true value of the home. If that isn’t the case, using one of the above methods should help. Just make sure you understand the consequences before making a decision.