Low appraisal: What happens when a house has a low appraisal?
The wild card in every residential real estate transaction is the appraisal process. Because the appraiser is a third party opinion on value and relies on a human being review that is subject to bias, things can go off the rails quickly during the transaction.
If your client has received a low appraisal and the accepted contract/offer is contingent on an appraisal on or above the accepted price, the first step is to review the contract. Follow any and all steps outlined there. For example, if the financing contingency is not met, your contract may say that you must notify the seller within a certain amount of days. It may say you need to outline that notification in writing, or in a provided addendum. Be sure you have reviewed those steps before moving forward, and discuss it with your client prior to making any moves on their behalf.
Once you’ve satisfied the actions of the contract, consider the following as next steps:
- Thoroughly Review the Appraisal Report: If it has not been sent to you, request that the buyer send you a copy of the report. Carefully review it looking for inaccuracies, omissions, and/or questionable comps.
- Call the Buyer’s Lender: Connect with the lender. While it is against the law for a lender to speak directly to an appraiser, they may have guidance based on the type of loan. For example, Jumbo Loans require more appraiser comps than a conventional loan, etc.
- Gather Supporting Evidence and Submit an RPV: Your goal is to find alternative information to support the purchase price, it is not to tell an appraiser how poor they are at their job. Compile a list of recent sales of comparable homes that are relevant and demonstrate the accepted price. Here are some very important things to consider during this step:
- Recent Closed Sales: It’s important to understand that comparable sales that are older than 6 months will not carry as much weight as a recent sale in the last 3 months. Sending an appraiser older comparables is very unlikely to alter their view or position. Also highlight any upgrades or renovations the seller may have made that were not considered.
- Style of Home: The comps should be of similar style, levels and bed/bath count. A 3 bedroom, one bathroom, one level ranch cannot be used to compare a 3 bedroom, one bathroom, three level Craftsman.
- Radius Distance: Homes that are closer to the subject property will be weighted higher than a comparable sale 3 miles away. For good measure, your comparables should be within one mile of the subject property.
- Lot Size: A home on 2 acres is not a comp to a home on a standard 50 x 100 lot.
- Features Specific to a Region: If there is a feature that is standard in the region that is missing in the subject, it will impact value. For example, in a high density region where parking is difficult, garages and off-street parking would be weighed in an appraisal for value.
- Provide only new comps per the RPV format specifications:
- Engage Your Client: As mentioned above, when dealing with a low appraisal, it’s important you get instructions from your client before doing anything. If you intend to attempt an appraisal rebuttal, remember that you work on behalf of your client, and it is ultimately their decision on what happens next. Involve them in the information you have gathered, and explain to them why you think you can prove the price.
- Request a Reconsideration of Value: If you believe the appraisal is flawed, submit a rebuttal. Engage the lender on how to do that if you do not have the contact information of the appraiser.
- Request Another Appraisal: Discuss with the lender an opportunity to have a second appraisal. While these are rare, sometimes they can be an option.
- Negotiate with the Seller: In the event there is no supporting evidence to overturn the appraiser’s report, your next approach is to negotiate with the seller. Request that all parties agree to the lower appraised price. It is likely that in the appraisal, it will identify a reason why the home did not appraise at accepted value. Communicate that to the seller through their representative. Taking the position that this judgment of value is not in the buyer’s hands can sometimes soften this bitter pill of information. Again, be sure to follow the timelines and deadlines outlined in the sales agreement contract.
- Have the Buyer Bridge the Gap: When an appraiser comes in low, it creates a gap between the accepted price and the appraised price. The buyer has the option to make up the difference by bringing in more cash to the transaction. For example, The Sales Contract has an accepted offer of $200,000. The home appraises at $190,000. The buyer has an option to bridge the gap by bringing in an extra $10,000 to make up the difference. Note, this is over and above the buyer’s down payment and closing costs.
- Terminate the Contract: In transactions involving lenders, the sales contract likely has contingency language around low appraisals. For example, “if the property or buyer does not qualify for financing”, or something like “the property must appraise at the accepted value per the contract” and then it will instruct all parties as to what happens next. Should it not appraise, parties should do x within y amount of time. If you are not sure, it is imperative that you contact a managing or designating broker in your brokerage for guidance. The last thing you want to do is put your client in breach of contract status.
If the appraisal comes in low, don’t panic. You and your client have options. Be sure to review the data and double check all reports before exploding emotionally. Low appraisals can be very frustrating, but maintaining a professional demeanor is critical in navigating the situation.
Read more about low appraisals and RPVs here
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