You’ve signed the contract, bugs have been smoothed out, details are clear and things are moving along nicely. Inspections have been completed, the results were acceptable and the closing date is nearing its target. Everyone is waiting for the results of the home appraisal. The house sold for a reasonable price and no one is too worried, but the loan commitment letter still needs to be issued. Then, everyone gets a phone call. The appraisal is $7500 less than the sales price. Everyone wants to panic- buyers, seller, agents, etc. – what can be done? Don’t panic. Relax. Take a deep breath. Due to the fact that one or both parties may have another contract waiting on the successful completion of this one, it’s very possible that a solution can be found. Keep you cool, develop a plan and if you work through the problem, the sale can move forward. In order to resolve the issue, here are some possible options:
Seller reduces price
This isn’t the only solution, but it is a very common one. Is the seller willing to reduce the price of the home? Many sellers are willing to negotiate in order to save the sale. If the buyers are obtaining a mortgage, they can probably back out of the contract, based on a financing contingency, because the low appraisal will affect the way the lender views the home. However, if the seller reduces the price, there is no need to back out. If you are a cash buyer, be sure to become protected with a contingency clause stating that you can get out of the deal if the appraisal doesn’t come in at or above the selling price.
Buyer Pays More
Depending on how badly the buyer wants the home, the buyer may chose to make a down payment or raise the loan amount. However, this might not correct the problem. Sometimes, although the buyer is prepared to pay additional money to make things work, the lender still won’t approve the loan. Often lenders don’t want to finance a property with a negative equity, despite the buyers willingness to take a risk. Be prepared to find out all your options if you chose this scenario.
Negotiation Buyer and Seller
Buyer and Seller are both willing to give a little and they come to an agreement. The real estate agents, escrow or outside influence could be called in to mediate.
Dispute the Appraisal
You can always ask the original appraiser to re-evaluate the property. Your agent should be able to find out which houses were used as comparisons. If your agent doesn’t agree that they were good comparables, talk to the appraiser. Most appraisers haven’t seen other houses up close the way real estate agents do. It is possible that the appraiser used houses that either needed a lot of work or weren’t as comparable as the appraiser first thought. If poor condition of the houses can be verified, it wouldn’t hurt to ask the appraiser to see if any adjustments could be made. NOTE- under VA guidelines you only have 48 hours after appraisal is issued but before it is uploaded to dispute the opinion of the appraiser. If the appraisal will be low in a VA transaction, the appraiser must notify the lender and/or agents involved and give them the opportunity to present a case for higher value.
Personal Property Won’t be Included
An appraiser can only put a value on land and improvements of land. If your original contract includes furniture or other types of property, other than land, it won’t be considered as part of the appraisal. If other personal property is desired by the buyer, it should be paid for separately.
Ensure Promised Funds Are Available
Often sellers promise to pay all or part of the buyer’s closing costs. Keep in mind that if the price of the home must be reduced, the sellers may not want to pay the closing costs. Always talk with your loan officer about their policies and be sure to get this agreement in writing, in case the appraisal comes in lower than expected.
Sometimes it takes a low appraisal for a seller to become convinced that his/her house is overpriced. If it is, the asking price should come down. If the seller is willing to work things out, a low appraisal won’t matter as much. If the seller isn’t willing, you might have to consider withdrawing. Either way, you’ll find some resolution.