In the wild world of real estate, anything can happen. It is atypical, but not impossible, for an appraisal to come in below the purchase price of a home. What should you do if this unfortunate circumstance happens? There are a few things to consider if your appraisal comes in low.
It is imperative that buyers and sellers hire Realtors to represent them before getting into a transaction. The appraisal is just one part of a real estate purchase. Getting from the preapproval to the closing table is a complicated process and anything could go wrong. Proper representation and good advice from a real estate professional are essential.
Mortgage lenders take on a substantial risk every time they make a loan. They mitigate this risk by employing the four C’s of underwriting: character, capacity, credit, and collateral. This blog focuses on collateral, also known as the subject property. A lender needs to know that the collateral presented has enough value to substantiate the risk involved in making the loan. The sad reality is that some borrowers do default. Whether the default is the result of poor financial management, uncontrollable circumstances, or even death, the lender needs recourse in case a borrower stops paying. The value of the home is a big factor in the underwriter’s decision on whether or not to approve a particular loan package.
The real estate market has favored sellers in recent months. This is largely due to a scarcity of inventory. Basic supply and demand dictate that prices will increase when there are more buyers than sellers in a marketplace. This has caused home values to appreciate and sometimes even results in bidding wars where buyers become willing to drastically increase their offer in a short amount of time. This may seem like a home seller’s paradise, but a multiple-offer, bidding war situation is one in which appraisals are more likely to come in low. Most buyers do not have the ability to offer cash for a home and will present their offer with the intent to obtain a mortgage. When the home is being financed with a mortgage, then lender will order an appraisal on the collateral (the subject property). Sellers must keep this in mind when working with buyers who obtain mortgage financing. It may be necessary to lower the purchase price after an appraisal comes in low or put a home back on the market seeking cash-only offers.
Buyers have gotten creative over the past year when it comes to making offers. This includes offering escalation clauses, waiving the right to a home inspection, and including personal letters and photographs with an offer. None of the aforementioned items are financially beneficial to the buyer, but they do help with negotiating prowess. In a low-inventory market, many buyers are competing for a small number of homes. Some buyers are offering to pay above the appraised value when paying cash or if their lender allows this type of offer. Paying an amount in excess of the appraised value may be legal, but it is generally not advised from a financial standpoint. Emotion and scarcity drive home prices upward but history shows that spikes in value do not perpetuate when the market corrects.
Everybody makes mistakes. Finding a mistake on an appraisal is a possibility, though highly unlikely. Think “one in a million chance.” If your appraisal comes in low and your Realtor is sure that an error was made, he or she could contact the appropriate parties to contest the appraised value or to request a review appraisal. This practice is not encouraged since appraisers already follow the Uniform Standard Professional Appraisal Practices (USPAP). Thus, they give solid value estimates nearly 100% of the time.
A housing transaction should be beneficial to all parties involved. If an appraisal comes in low, it means that the collateral is not valued as high as was previously thought. This new information should be thoughtfully considered by all parties to the transaction. Both the buyer and the seller should be willing to renegotiate (via their Realtors) and to make concessions if necessary. If a new, mutually beneficial agreement cannot be reached based on the lower appraised value, it might be prudent for the buyer and seller to release one another from the purchase contract. Sometimes the best deal is no deal at all. However, often times the best deal is a renegotiated deal where all parties still leave the closing feeling that they have gained something. Real estate deals are not simple by nature and the appraisal is a significant factor. Good business dictates that everyone gains something and comes out better as a result of the transaction.
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