Options for buyers and sellers when the house doesn’t appraise for the contract price

Options for buyers and sellers when the house doesn’t appraise for the contract price

Appraisers are often times accused of “killing” deals due to low appraisals. This could not be further from the truth because this would infer that appraisers can arbitrarily assign values to a property. Appraisers are often asked how much value they gave for this or that feature of a home, but that is not the correct way to look at what appraisers do. Rather than appraisers giving value to a property the proper way to describe it would be that appraisers provide an opinion of value based on the measurement of market indicators.

An appraisal that came in below the contract price usually indicates that the contract price does not reflect the price that other similarWhat can be done when the house doesn't appraise homes are selling for or are listed at. I won’t be naive and act like there aren’t some appraisers who are either not knowledgeable of an area or are just incompetent, but that’s not what we’re discussing here and we’ll save that discussion for another day.

There are other options for buyers and sellers when the house doesn’t appraise for the contract price other than the deal dying, so let’s take a look at that today.

Lower the price

Let’s assume that the appraisal was done by an appraiser who knows what he’s doing and the value is spot on. Rather than letting the deal fall through, it seems logical for the buyer and seller to agree on a price reflected in the appraisal report and finalize the deal. If not, then a lot of time and money has been wasted and you’ll have to start over with a new buyer to get back to the spot you’re at right now, since the next appraiser will most likely have similar results.

Lowering the price is not an acceptance of getting less for your house than what it is worth but rather selling it for what the market will bear. I sometimes think that sellers get a certain number fixed in their mind about how much they want to get out of their home. This amount may be based on irrelevant criteria such as how much is owed on the mortgages on the house or how much they have spent on home improvements. The cost of an improvement does not alway equate to how much value it provides, as it can sometimes be more or less than the actual cost. The main focus for determining your home’s market value should be recent and similar comparable sales rather than how much is owed on the house.

Let the buyer make a larger down payment

Every lender has their own criteria and underwriting guidelines, however one option to consider is for the buyer to make a larger down payment. By doing this, and lowering the loan amount to the bank’s acceptable loan to value ratio, the deal may be salvageable.

I think that one of the common misconceptions about buyers is that they will only put down a negligible down payment. This may be the case, or it may not. If a home is exactly what the buyer is looking for, and they have the funds available, they may be willing to come out of pocket with more cash for the down payment. The buyer will need to keep in mind that they may be paying a little over market but this wouldn’t be the first time a buyer did. As they say, “you’ll never know until you ask”, so why not open up this conversation with the buyer?

Meet in the middle

A combination of the two above mentioned options involves some action by both the buyer and the seller. Considering the motivations of each party will go a long way in deciding if this is a viable option. If the seller lowers their price a little, and the buyers puts in a larger down payment, then the transaction can be completed.

In both this scenario and the above situation, the buyer has increased their commitment in the loan which should be comforting to the lender as they will be less likely to walk away from the mortgage since they have so much tied up in it. Many of the deals that went into foreclosure during the real estate crisis was due to buyers having small down payments and not having any “skin in the game” as they say.

Conclusion

One way to avoid the appraisal coming in lower than the contract is to have an appraisal done before listing the home. By getting an appraisal in order to set the listing price you are making sure that you price the home to the market and not some arbitrary amount. This can prevent the house from sitting on the market for an extended period of time. You can order an appraisal today by either calling or emailing me.

Question

Can you think of any other options for buyers and sellers when the house doesn’t appraise for the contract price? If you can then please leave a comment below, or if you have other comments I’d like to hear your take. Thanks for reading.

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Comments

  1. Negotiation can begin when the offer is made and continue after the appraisal is completed too. Sometimes a contract process is regarded as something that should not be changed, but when new circumstances arise (including a lower appraisal), it’s entirely reasonable to go back to the table to negotiate.

  2. Great post Tom. A couple other options are to cancel the contract (not an attractive option) and to dispute the appraisal (I know you said that you did not want to get into that in this article).

    • Thanks Gary. Yeah, an incompetent appraiser is definitely possible but my point of focus here is an appraisal that is accurate and what your possible options are. Thanks for your input.

Trackbacks

  1. […] A lot of Real Estate Agent’s will tell you that you can’t overpay for a home because the bank appraises it. There is some truth to this, though it’s safe to say the statement isn’t 100% accurate. You do have options when the home doesn't appraise. […]

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