In a hot market, low appraisal values are a common issue. Prices can increase much quicker than appraisal values may reflect (given that they are based on sales over the last 6 months). Below, we take a look at what happens when an appraisal comes in too low. There are essentially 3 possible outcomes:
1 – Buyer Increases Down Payment
When an appraisal fails to match or exceed the purchase price, it affects the amount that a buyer can borrow for the purchase. For instance, let’s assume a home is under contract for $525,000. On a 95% loan-to-value (LTV), the buyer expects to receive a loan for $498,750 and put down $26,250 as a down payment (plus closing costs). If that property only appraises for $510,000, the lender will only loan 95% of that lower value, or $484,500. These leaves a gap of $40,500 instead of $26,250. If a buyer can pay that additional $14,250, then the sale can move forward as planned.
2 – Renegotiate Price
In most cases, buyers are unable or unwilling to cover an appraisal deficiency. What commonly occurs is a renegotiation of price. In the example above, if the seller agrees to reduce the price to $510,000, to match the appraised value, then the problem is solved. The sale can move forward as planned and the buyer benefits from a lower purchase price. However, it’s not always so straight forward in a hot market.
There were likely multiple offers for the property. Thus, there may be an abundance of backup buyers. Could one of those be able or willing to cover an appraisal deficiency? If so, a seller may be unwilling to renegotiate the price with the current buyer.
Another possible solution is for a partial reduction in sale price. Perhaps buyer and seller meet somewhere in the middle. The seller would accept a lower price AND the buyer would pay a little more out-of-pocket. Using the example above, perhaps the price drops to $517,000. The seller receives $8k less from the sale and the buyer would put down $32,500 ($6,250 more than originally needed). Such a compromise can allow a deal to move forward.
3 – Deal Falls Through
It’s very possible that when an appraisal comes in too low, that a buyer and seller are unable to reach a resolution. If the seller is not willing to drop the price and a buyer is not able or willing to put any additional funds into the purchase, then the deal simply falls through. After signing a release to terminate the contract, a seller can entertain other offers and a buyer can submit offers on other properties. Both would essentially be starting over. This is normally not ideal for either given the level of uncertainty.
Agents Play a Big Role When an Appraisal Comes in Too Low
When an appraisal comes in too low, real estate agents play a critical role in keeping a deal together. They can help negotiate compromises between parties, using creative solutions from their years of experience. They may submit new information to appraisers that allow them to re-evaluate the price. For instance, perhaps the appraiser missed a valid comparable sale or referenced a property that was a poor match. This highlights the importance of working with a good agent whether you are buying or selling a property in Massachusetts. Low appraisals can be stressful and can jeopardize a deal, but issues can often be resolved when all parties involved have an interest in finding a resolution.
