Don’t let a low real estate appraisal cause panic
By Ron Feir, ABR, CRS, e-PRO, GRI, MRP, RSPS, SFR, SRES, SRS
• Appraisals are vital to the mortgage loan process. Some of them are bound to come in lower than expected.
• Reasons why a property appraisal may come in low are many and varied.
• Real estate agents and clients should recognize their options in the event of a low appraisal.
REALTORS® are always concerned about low real estate appraisals and sometimes lose sleep over the possibility of unfavorable results. However, appraisals are vital to the mortgage loan process. They keep the loan-to-value ratio in check.
Why do low appraisals occur?
The National Association of REALTORS® reports in its monthly REALTORS® Confidence Index Survey for sales between November 2016 and January 2017, 22% of the respondents faced appraisal issues. In NAR’s Survey of Mortgage Originators, 55% of the respondents for that time period reported appraisal issues.
There are many reasons why a property appraisal may come in low. Here are a few:
- Artificially inflated prices resulting from multiple offers.
- Declining market values due to fewer buyers.
- Fallout from an abundance of foreclosure or short sales in the neighborhood, especially when no other comparable sales exist.
- Overpricing by the seller.
- Inexperienced appraiser.
- Rising market values due to limited inventory and few comps.
- Appraiser overlooked pending sale data, which could reflect higher comparable sales when closed, or the appraiser selected comparable sales from the wrong neighborhoods.
- Appraiser selected comparable sales from the wrong neighborhoods.
Solutions for low appraisals
Don’t panic. It’s tough to remain calm when it appears the pending sale will fall apart, but both parties have options. Here are a few:
• Buyer can make up the difference in cash. The lender cares about the appraisal only to the extent it affects the loan-to-value ratio. A low appraisal does not mean the lender won’t lend. It means the lender will make a loan based on the ratio agreed to in the contract at the appraised value. Sometimes the buyer’s lender will not allow the buyer to give cash for the difference and, in that event, have the buyer pay some of the seller’s closing costs.
• Seller can lower the price. This is often the best solution if the home was overpriced or the value was inflated. It makes the buyer happy and the lender is satisfied. There is no guarantee that if the buyer walks away, the seller won’t receive a low appraisal from the second buyer’s lender, not to mention the time and trouble it takes to sell the property again. Sometimes a bird in the hand is best.
• The seller can offer to carry a second mortgage for the difference. If the buyer really wants the home but cannot come up with the difference in cash, making payments or a lump sum payment at a later date to the seller is an option. After the escrow closes, sellers often retain the right to discount the second mortgage, sell it for less than face value to an investor.
• Supply a list of comparable sales. Ask the agents involved to put together a list of recent comparable sales that justify the agreed-to sales price. Submit that list to the underwriter and ask for a review of the appraisal. Try to use comps closer to the subject property than the comps used by the appraiser.
• Compromise on the value. Sometimes sellers will back off a little bit on the buyer paying the entire difference and will settle somewhere between a full cash contribution and lowering the price.
• Cancel the transaction. Many purchase contracts contain a loan contingency if the appraisal comes in low, the buyer does not qualify to buy the property at the agreed-to terms in the contract. A properly written loan contingency allows the buyer to cancel the contract if the loan-to-value ratio fails to occur, and requires the seller to release the buyer’s earnest money deposit.
• Order a second appraisal. If your loan is an FHA loan, ask the lender for a list of approved appraisers. Either the seller or the buyer can pay for the second appraisal. Sometimes the second appraisal will come in higher than the first, especially if the first appraiser was inexperienced or made mistakes.
Have a low appraisal story? Share with us in the comments section below.
Ron Feir, ABR, CRS, e-PRO, GRI, MRP, RSPS, SFR, SRES, SRS, is a REALTOR® with Century 21 Gavish Real Estate (offices in Pahrump & Las Vegas) Pahrump, Nev. He was ranked #1 REALTOR® on Earth based on social media engagement by Mondinion.com.
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