Overcoming a Low Real Estate Appraisal
Posted by 
Wendy Ryan on Wednesday, January 6, 2010
In recent months, we have seen low home appraisals play a large role in the outcome of a real estate transaction. According to the National Association of Realtors, 20% of real estate agents have lost a sale due to a low appraisal. So you ask, what is going on?!? There are multiple factors for this change but the main causes are the following. First off, dropping home values, widespread short sales and foreclosures have made the job of an appraiser more complicated than ever. Appraisals are mostly based on previous home sales, so if homes have sat on the market for months on end or if they ended selling as a short sale, the data will most certainly be altered ending with a skewed value. Secondly, Fannie Mae and Freddie Mac have established a new set of rules when it comes to appraisals known as the “Home Valuation Code of Conduct” (www.freddiemac.com/singlefamily/home_valuation.html). These new rules have urged appraisers to err on the side of being conservative with their appraisal to avoid inflation in pricing.
What does this mean to you as a buyer?
Let’s say you have found your dream home and have come up with an agreed upon price with the seller of $800,000. After years of saving you are able to put 20% down and planning to acquire a mortgage loan for the remaining 80%, $640,000. Unfortunately, the appraisal came back at $750,000 (which is the price that your lender will use to determine the loan amount). An 80% loan now turns into $600,000 leaving you to pay a much larger down payment than you had saved for, $200,000 versus $160,000. What are your options from here?
- Most obvious, 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.
- Negotiate the seller to lower the price. If the home was overpriced it can be in the seller’s best interest to reduce the price in order to get it sold. If he/she doesn’t and the deal falls through, there is very good chance that they will be back in the same situation with buyer #2 if they are even fortunate enough to get another interested party.
- Order a second appraisal. If the initial appraisal was conducted by an inexperienced appraiser, or if they aren’t familiar with the area, many times the results will come in low. Unfortunately, this will be another expense incurred but can be paid by either the seller or buyer.
- Ask for a review of the appraisal. Have your agent pull a list of comparable sales in your area and submit them to the underwriter and ask them to re-evaluate. If the comparables come out in your favor (close to your agreed sale price) they will often raise the appraised value.
Bottom line; don’t carry the negative attitude that a low appraisal means the deal is dead. Most likely the seller is as motivated as you to close the deal so negotiations can typically alleviate the low appraisal. Stay positive and always know that you are in the driver’s seat.
Thanks for the tips! We really need to overcome this low real state appraisal.
Great tips, and it almost always never hurts to get a 2nd opinion. It’s also a good idea to look for appraiser reviews online so you know which companies you can trust.